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Assume that you want to invest into a risky fund a proportion (y) of your capital, and invest the remainder (1-y) into a risk-free asset.

Assume that you want to invest into a risky fund a proportion (y) of your capital, and invest the remainder (1-y) into a risk-free asset. The risky fund has an expected rate of return of 15% and a standard deviation of 20%. The T-bill rate is 7%. Suppose that you want to have a standard deviation of your portfolio of a maximum of 15%. What is the maximum expected return you can achieve? Draw the capital allocation line and highlight your chosen allocation. Please show all your steps.

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