i) Given a simple world with two assets, a bond fund and a stock fund, clearly detail the steps involved in arriving at the 1) efficient frontier, and 2) market (optimal) portfolio.

ii) What is the significance of the Capital Market Line? To be more specific, what relationship does this line depict? Give a brief discussion on its application.

iii) One important assumption behind portfolio theory is that investors are "meanvariance maximizers." What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier.

iv) Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?