Problem 1: (a portfolio composed of one risky asset and one risk-free asset) Assume the risky asset is a stock, with - expected net return of 0.15 in a one-year period, and - standard deviation of net return of 0.25 in a one-year period. Assume the risk-free asset is a government bond, with - net return of 0.06 in a one-year period - zero standard deviation of net return (i.e. risk-free) Suppose we have $10,000. We are to invest fraction v of our money in the risky asset and fraction (1-v) of our money in the risk-free asset. (a) What is the expected net return of our portfolio after one year? (b) What is the variance of the net return of our portfolio after one year? (c) Suppose you want to set the standard deviation of the net return as 0.05. How would you set v? Hint: Recall: Var(aX+bY) = a Var(X)+bVar(Y) + 2ab. Cov(X,Y)