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Review problem four on page 471. Use the information in the problem as to answer the following questions using an APA formatted essay:a) If Thom is interested in improving the Sharpe ratio of his portfolio, will he invest apositive amount in one of the funds? Which one? Carefully explain your reasoning.b) Suppose Thom is more risk averse than his friend, Nick Cave. Both cannot short-sell securities,and both are thinking of splitting their entire portfolio between the U.S. portfolio that Thom iscurrently holding, the STCMM fund, and the LYMF fund. They also do not invest in the risk-freeasset and do not consider levering up risky portfolios. Compare the two investors optimalholdings. Who will invest more in the LYMF fund, and who will invest more in the STCMM fund?Why?Write a 3 to 5 page paper (1000 to 1500 words) in APA format. )2. Introductiona. A thesis statementb. Purpose of paperc. Overview of paper3. Body (Cite sources with in-text citations.)4. Conclusion Summary of main pointsa. Lessons Learned and Recommendations

5. References List the references you cited in the text of your paper according to APA format.(Note: Do not include references that are not cited in the text of your paper). Below is the article.

PROBLEMS 1. The EAFE is the international index comprising markets in Europe, Australia, and the Far East. Consider the following annualized stock return data: Average U.S. index return:14% Average EAFE index return:13% Volatility of the U.S. return:15.5% Volatility of the EAFE return:16.5% Correlation of U.S. return and EAFE return:0.45 a.What would be the return and risk of a portfolio invested half in the EAFE and half in the U.S. market? b. Market watchers have noticed slowly increas- ing correlations between the United States and the EAFE index, which some ascribe to the in- creasing integration of markets. Given that the volatilities remain unchanged, is it possible that the volatility of a portfolio that is equally weighted between the two indexes has higher volatility than the U.S. market? 2. Let the expected pound return on a U.K. equity be 15%, and let its volatility be 20%. The volatility of the dollar>pound exchange rate is 10%. a.Graph the (approximate) volatility of the dol- lar return on the U.K. equity as a function of the correlation between the U.K. equitys return inpoundsandchangesinthedollar > poundex- change rate. b. Suppose the correlation between the U.K. eq- uity return in pounds and the exchange rate change is 0. What expected exchange rate change would you need if the U.K. equity in- vestment is to have a Sharpe ratio of 1.00? (Assume that the risk-free rate is 0 for a U.S. investor.) Does this seem like a reasonable expectation? 3. Suppose General Motors managers would like to invest in a new production line and must determine a cost of capital for the investment. The beta for GM is 1.185, the beta for the automobile industry is 0.97, the equity premium on the world market 13. Suppose AZT is a small value stock and that you use both the CAPM and the Fama-French model to compute its cost of capital. Under which model is the cost of capital for AZT likely to be higher? is assumed to be 6%, and the risk-free rate is 3%. Propose a range of cost-of-capital estimates to con- sider in the analysis. 4. Thom Yorke is a typical mean-variance investor, currently invested 100% in a diversified U.S. eq- uity portfolio with expected return of 12.46% and volatility of 15.76%. Thom is considering adding the STCMM fund to his portfolio. STCMM invests in U.S. small-capitalization, high-technology firms and has an expected return of 14.69% and a volatility of 32.5%. Thom has determined its cor- relation with his current portfolio to be 0.7274. He is also intrigued by the LYMF fund, which invests in several emerging markets. The ex- pected return on the fund is only 12%; it has 35% volatility and a correlation of 0.2 with his portfo- lio. The correlation of the LYMF fund with the STCMM fund is 0.15. Assume that the risk-free rate is 5%. a.If Thom is interested in improving the Sharpe ratio of his portfolio, will he invest a positive amount in one of the funds? Which one? Care- fully explain your reasoning. b.Suppose Thom is more risk averse than his friend, Nick Cave. Both cannot short-sell se- curities, and both are thinking of splitting their entire portfolio between the U.S. portfolio that Thom is currently holding, the STCMM fund, and the LYMF fund. They also do not invest in the risk-free asset and do not consider levering up risky portfolios. Compare the two investors optimal holdings. Who will invest more in the LYMF fund, and who will invest more in the STCMM fund? Why? 5. Economists continue to be puzzled by the appar- ent home bias of investors across countries. With mean-variance preferences, investors ought to allo- cate much more of their wealth to foreign equities and bonds. Three explanations for the phenomenon are given below, all of them based on empirical facts. For each one, discuss whether the statements are true or false and in what sense they help, or fail,

PROBLEMS 1. The EAFE is the international index comprising markets in Europe, Australia, and the Far East. Consider the following annualized stock return data: Average U.S. index return:14% Average EAFE index return:13% Volatility of the U.S. return:15.5% Volatility of the EAFE return:16.5% Correlation of U.S. return and EAFE return:0.45 a.What would be the return and risk of a portfolio invested half in the EAFE and half in the U.S. market? b. Market watchers have noticed slowly increas- ing correlations between the United States and the EAFE index, which some ascribe to the in- creasing integration of markets. Given that the volatilities remain unchanged, is it possible that the volatility of a portfolio that is equally weighted between the two indexes has higher volatility than the U.S. market? 2. Let the expected pound return on a U.K. equity be 15%, and let its volatility be 20%. The volatility of the dollar>pound exchange rate is 10%. a.Graph the (approximate) volatility of the dol- lar return on the U.K. equity as a function of the correlation between the U.K. equitys return inpoundsandchangesinthedollar > poundex- change rate. b. Suppose the correlation between the U.K. eq- uity return in pounds and the exchange rate change is 0. What expected exchange rate change would you need if the U.K. equity in- vestment is to have a Sharpe ratio of 1.00? (Assume that the risk-free rate is 0 for a U.S. investor.) Does this seem like a reasonable expectation? 3. Suppose General Motors managers would like to invest in a new production line and must determine a cost of capital for the investment. The beta for GM is 1.185, the beta for the automobile industry is 0.97, the equity premium on the world market 13. Suppose AZT is a small value stock and that you use both the CAPM and the Fama-French model to compute its cost of capital. Under which model is the cost of capital for AZT likely to be higher? is assumed to be 6%, and the risk-free rate is 3%. Propose a range of cost-of-capital estimates to con- sider in the analysis. 4. Thom Yorke is a typical mean-variance investor, currently invested 100% in a diversified U.S. eq- uity portfolio with expected return of 12.46% and volatility of 15.76%. Thom is considering adding the STCMM fund to his portfolio. STCMM invests in U.S. small-capitalization, high-technology firms and has an expected return of 14.69% and a volatility of 32.5%. Thom has determined its cor- relation with his current portfolio to be 0.7274. He is also intrigued by the LYMF fund, which invests in several emerging markets. The ex- pected return on the fund is only 12%; it has 35% volatility and a correlation of 0.2 with his portfo- lio. The correlation of the LYMF fund with the STCMM fund is 0.15. Assume that the risk-free rate is 5%. a.If Thom is interested in improving the Sharpe ratio of his portfolio, will he invest a positive amount in one of the funds? Which one? Care- fully explain your reasoning. b.Suppose Thom is more risk averse than his friend, Nick Cave. Both cannot short-sell se- curities, and both are thinking of splitting their entire portfolio between the U.S. portfolio that Thom is currently holding, the STCMM fund, and the LYMF fund. They also do not invest in the risk-free asset and do not consider levering up risky portfolios. Compare the two investors optimal holdings. Who will invest more in the LYMF fund, and who will invest more in the STCMM fund? Why? 5. Economists continue to be puzzled by the appar- ent home bias of investors across countries. With mean-variance preferences, investors ought to allo- cate much more of their wealth to foreign equities and bonds. Three explanations for the phenomenon are given below, all of them based on empirical facts. For each one, discuss whether the statements are true or false and in what sense they help, or fail,