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 REITs over the years 2004 2020.

Since the role of the endowment in meeting budget needs has increased dramatically in the past few years, City College decided to review its past performance and future contributions to the institution. The school hired your company to assess its current performance and to recommend an optimal portfolio mix. In particular, the school feels strongly that 0.8% per month represented a floor below which the portfolio expected return should not drop and wants 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. Is the portfolio of risky assets currently chosen by the colleges fund manager an efficient portfolio? If not, please explain and calculate the investment proportions (in the five risky assets chosen by the fund) required to construct an efficient risky portfolio, which would deliver the same expected return as the current choice of risky portfolio (for this part, assume there is no risk-free investment undertaken by the fund).
2. Calculate the investment proportions required to achieve the optimal (tangency) risky portfolio, given the possibility of investing in risk-free T-bills (you may use Excels solver module). What is the expected return and standard deviation of the tangency portfolio?