1. Ms. Santos is a first time investor and wants to build a portfolio using only U.S. Treasury Bills and an index fund that closely tracks the S&P 500. The T-bills have a return of 3 percent. The S&P 500 has as standard deviation of 22 percent and an expected return of 13 percent.

1. Ms. Santos is considering different combinations of the amount she invests each investment. Here are her possible portfolios:

Portfolio A: 100% invested in Treasury Bills

Portfolio B: 75% in Treasury Bills and 25% in the Index Fund

Portfolio C: 25% in Treasury Bills and 75% in the Index Fund

Portfolio D: 100% invested in the Index Fund

For each of these possible portfolios, calculate the expected return and standard deviation. (16 Points)

2. Draw the CAL for Ms. Santos and mark the points for each of her possible portfolios in Part (a). Graph paper is provided at the end of the test. To receive full credit, make sure you clearly label the axes and the points on your graph. (6 Points)

3. Add the efficient frontier to your graph. What is the point at which the CAL is tangent to the efficient frontier? (4 Points)