City College is a community college with a $100 million endowment. Since its establishment, it has had a fixed investment policy of 55% stocks (spread 10/15/30 amongst small, medium and large cap stock portfolios), 35% bond index fund (VBMFX) and 10% Equity REIT solver the years 20042020.Since the role of the endowment in meeting budget needs has increased dramatically in the past few years, City College has decided to review its past performance and future contributions to the institution. The school learned that another local university had hired a financial advisory company to review its investment policy. City College decided to the same. The school hired your company to assess its current performance and to recommend an optimal portfolio mix. In particular, the school felt strongly that a return of 0.8%per month represented a floor below which the portfolio return should not drop and want you to suggest an efficient asset allocation to achieve this goal. Your manager has decided to assign the task to your team. You are required to address the following questions. For simplicity, we assume that short sales are allowed (unless explicitly ruled out) and borrowing at the risk-free rate is possible.

1. Continue to assume that you can invest in the risk-free asset. Calculate the investment proportions required to construct an efficient portfolio with an expected return equal to the existing portfolios expected return(note: this portfolio should include the risk-free asset). Also calculate the expected standard deviation of returns on this portfolio.

2.Continue to assume that you can invest in the risk-free asset. Suggest an efficient portfolio allocation to achieve the college's objective of a 'floor' rate of return equal to 0.8%per month. What is the expected standard deviation of the portfolio?