Exercise 2. Suppose the only three risky assets in the market have the following expected returns and standard deviations: Asset A Asset B Asset C Expected returns 12.5% 15.0% 25.0% Standard deviations 10.0% 15.0% 17.5% The T-bill rate is 4.5%. a) An investor is considering the possibility to combine asset A with the other two assets (B or C) in a new portfolio. Calculate the return and risk of both minimum-risk portfolios given the following correlations between assets: PAB = -1; PAC = 0 b) Assume the investor selects portfolio AC. Now he/she is considering to include the risk-free asset to reduce the risk of the portfolio. What portfolio weights will the investor choose for the risk-free asset and the risky assets to get an expected return of 15%? What is the risk of this new portfolio? Compare this portfolio with portfolio AC