Consider the following securities: Risky security: E(R) = 10% and standard deviation= 20. Risk-free security: Rf = 5%. You want to construct a portfolio combining the risky security and the risk-free security such that you get an expected return of 15%.

(a) What weights would you need to put in the risky and the risk-free securities to earn a 15%?

(b) What is the standard deviation of this portfolio? What is the reward-to- variability ratio?

(c) Draw the capital allocation line (CAL). Label the points and the axes clearly.

(d) Now, suppose that instead of one risky security and one risk-free security, you can invest in two risky securities. Security 1: E(R1) = 10% and standard deviation₁ = 20%. Security 2: E(R2) = 6% and standard deviation₂ = 10% with p= 0.3. What weights would you need to place in the two risky securities to earn a 15% expected return? What is the standard deviation of this portfolio?

(e) Find the expected return and the standard deviation of the minimum-variance portfolio (MVP) on the investment opportunity set.