Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 90 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume these values are representative of investors expectations for future performance and that the current T-bill rate is 5%. 1. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights as follows: WBills WIndex 0.0 1.0 0.2 0.8 0.4 0.6 0.6 0.4 0.8 0.2 1.0 0.0 2. Calculate the utility levels of each portfolio of Problem 10 for an investor with A = 2. What do you conclude? 3. Repeat Problem 2 for an investor with A = 3. What do you conclude?

4. Suppose that the borrowing rate that your client faces is 9%. Assume that the equity market index has an expected return of 13% and standard deviation of 25%, that rf = 5%. Draw a diagram of your clients CML, accounting for the higher borrowing rate. Superimpose on it two sets of indifference curves, one for a client who will choose to borrow and one for a client who will invest in both the index fund and a money market fund. WRITTEN ANSWER PLEASE