In light of the new economic conditions, CalPERS revises its investment approach. It will continue to hold the S&P 500 index (market portfolio) but will no longer hold 3-month T-bills (risk-free asset) in its portfolio. In addition to the S&P 500 index, CalPERS will invest in a portfolio of either low-grade/high- yield bonds (junk bonds) or private equity. The S&P 500 index is still expected to have a volatility of 18% and CalPERS has the following information on junk bonds and private equity: Asset Class Volatility Beta Expected Return 8.00% 9.50% Correlation with S&P 500 Return 0.45 0.68 Junk Bonds Private Equity 50% 40% 1.25 1.50 6. What would CalPERS' new portfolio allocation (portfolio weights) have to be in order to achieve an expected return of 7% if in addition to the S&P 500 index CalPERS invested in: a. Junk bonds b. Private equity 7. Compute CalPERS' portfolio volatility in each case (i.e. 6a and 6b). Should CalPERS invest in the portfolio that includes junk bonds (6a) or private equity (6b)? 8. Which is a better choice between the portfolio chosen in Q7 and the portfolio in Q5? In light of the new economic conditions, CalPERS revises its investment approach. It will continue to hold the S&P 500 index (market portfolio) but will no longer hold 3-month T-bills (risk-free asset) in its portfolio. In addition to the S&P 500 index, CalPERS will invest in a portfolio of either low-grade/high- yield bonds (junk bonds) or private equity. The S&P 500 index is still expected to have a volatility of 18% and CalPERS has the following information on junk bonds and private equity: Asset Class Volatility Beta Expected Return 8.00% 9.50% Correlation with S&P 500 Return 0.45 0.68 Junk Bonds Private Equity 50% 40% 1.25 1.50 6. What would CalPERS' new portfolio allocation (portfolio weights) have to be in order to achieve an expected return of 7% if in addition to the S&P 500 index CalPERS invested in: a. Junk bonds b. Private equity 7. Compute CalPERS' portfolio volatility in each case (i.e. 6a and 6b). Should CalPERS invest in the portfolio that includes junk bonds (6a) or private equity (6b)? 8. Which is a better choice between the portfolio chosen in Q7 and the portfolio in Q5