Problem 2 (20 points)

You are considering investing in three different assets. The first is a stock, the second is a long-term government bond and the third is a T-bill money market fund that yields a sure rate of 5%. The probability distributions of both the risky assets:

	Expected Return	Standard Deviation
Stock (S)	15%	32%
Bond (B)	9	23

The correlation between the stock and bond returns is 0.10.

1. Compute the expected return and standard deviation of the optimal risky portfolio (aka optimal tangency portfolio). (10 points)

2. If as the investor you want an expected return of 12% from a complete-portfolio C formed by using the optimal-portfolio P and risk-free rate, what proportions of X, Y, and risk-free asset should the investor be holding in his / her complete portfolio? (10 points)