Jocelyn is indifferent between investing all her wealth (which is $5 million) in the risky asset and the risk-free asset. The risky asset has an expected rate of return of 12% per year and a standard deviation of 20% per year. The risk-free lending rate is 6% per year.

1.1 What does it mean by she is indifferent between investing all her wealth in the risky asset and the risk-free asset? What would be the optimal mix of the risky and risk free asset for her?

1.2 Mr. Hulk, a personal friend of Jocelyn, manages an investment fund. He offers a risk-free investment opportunity of 7% per year to Jocelyn, provided she can invest a minimum of $5 million. Suppose the investment opportunity is truly risk-free. Jocelyn realizes that in order to take advantage of this opportunity, she has to invest all her wealth with Mr. Hulk. Should she invest all her wealth with Mr. Hulk earning a risk-free rate of 7% instead of holding the optimal mix you computed in 1.1 above? Support your answer with calculations. [Please show calculations clearly in that provide the meaning of the numbers calculated.]