Investors can form complete portfolios out of two assets: a risk-free asset (T-bill) with a rate of return of 3%; and a risky portfolio with an expected return of 18% and return standard deviation of 20%. Answer the following questions:

a. Draw the capital allocation line.

b. The coefficients of risk aversion of Sara and James are 1 and 4, respectively. Compute each investors optimal capital allocation to the risky portfolio.

c. Compute the expected return and standard deviation of return of the optimal complete portfolios for Sara and James (found in part b), respectively.

d. Indicate Saras and Jamess optimal complete portfolios on the capital allocation line.