1. Explain how to construct an optimal risky portfolio and then an optimal complete portfolio. You can draw a graph if you think it would help with your explanations. However, a graph is NOT a must. If you only draw a graph without any explanations, no marks will be awarded.

2. [4 marks] Consider a CAPM economy in which the risk-free rate is 3%, the expected return on the market portfolio is 10% and the standard deviation of the market portfolio is 15%. If you want to construct the most efficient portfolio that rewards you a return of 12%, how will you allocate your wealth (i.e. what are the weights of the investments in your portfolio)? What risk (standard deviation) would you be bearing with this portfolio?