For questions, in which you are asked to find weight of an asset, input your answer in decimal form and round it to 4 decimals. For example, if you computed weight of equity fund as 0.23466 then input 0.2347 as your answer.

For questions, in which you are asked to find an expected return or standard deviation, input your answer as percentage and round it to 2 decimals. For example, if you computed the expected return of the optimal portfolio as 23.4576% then input 23.46 as your answer. Do not type the percentage sign.

As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset). Assume your personal risk aversion is 0.06 (A=0.06). The correlation between the equity fund and the bond fund returns is 0.10. In questions below you will need to form the minimum variance portfolio and the optimal portfolio by combining the equity fund and the corporate bond fund, and then, create a complete portfolio by combining the T-bill money market fund (the risk-free asset) and the optimal portfolio (the risky assets) accounting for the given risk aversion.

Fund	Expected rate of return	Risk (Standard deviation)
Equity fund	16%	38%
Corporate bond fund	7%	25%
T-bill money market fund	3%

1. Minimum variance portfolio (1)

a. Find the weight of the corporate bond fund in the minimum variance portfolio formed by equity fund and corporate bond fund.

b. Find the weight of the equity fund in the minimum variance portfolio formed by equity fund and corporate bond fund.

c. Find the expected rate of return of the minimum variance portfolio in %.

f. Find the risk (standard deviation) of the minimum variance portfolio in %.

2. Optimal portfolio

a. Find the weight of the corporate bond fund in the optimal portfolio formed by equity fund and corporate bond fund.

b. Find the weight of the equity fund in the optimal portfolio formed by equity fund and corporate bond fund.

c. Find the expected rate of return of the optimal portfolio in %.

d. Find the risk (standard deviation) of the optimal portfolio in %.

3. Complete portfolio

a. Compute the slope of the Capital allocation line (CAL) using the optimal portfolio as the risky portfolio.

b. Using your personal risk aversion (A=0.06) and the optimal portfolio as the risky portfolio, find the weight of the optimal portfolio in the complete portfolio.

c. Find the weight of the T-bill money-market fund in the complete portfolio.

d. Find the expected rate of return of the complete portfolio.

e. Find the risk (standard deviation) of the complete portfolio.

f. Calculate the weight of the corporate bond fund in the complete portfolio.

g. Calculate weight of the equity fund in the complete portfolio.