Assume the following two stocks:

Stock XStock Y

E(R) = 15 percent.E(R) = 10 percent.

Standard Deviation = 25%.Standard Deviation =15%.

Coefficient of Correlation between X and Y = 0 percent.

The risk-free rate is 5 percent.

a.Draw the opportunity set formed withXandY. Assign M to the global minimum variance portfolio. How do you call the Part XM?

b.Draw a tangent from the risk-free rate to the opportunity set. Call the tangency point "P".Assume that "P" is constructed with 60 percent inXand 40 percent inY.

c.Calculate the expected return and standard deviation of P.

d.What is the name of the tangent line?

e.What is the equation of the tangent line?

f.Assume your optimal portfolioCconstructed withPandRfearns an expected rate of return of 12 percent. Calculate the weights ofPandRfinC.

g.What are the weights of the risk-free security,X, andYin your optimal portfolioC?

h.Calculate the standard deviation of your optimal portfolioC.

i.If you need to construct the same portfolioCwith onlyXandYand obtain the same expected rate of return as in (f) above, What are the weights ofX, andYin your optimal portfolioC?

j.What would the standard deviation of this portfolio be?