Problem2(20points)

An investor constructs an optimal-portfolioPwith two risky stocks X and Y. The expectedrate of return of stock X is 15% and standard deviation is 25% andexpected return of stock Yis 12% and standard deviation is 20%. The risk-free rate is 5%. The correlation coefficient between the stocks is 0.15. The optimal-portfolio weights of X and Y are 67.04% and 32.96%respectively.

1. Compute the expected return and standard deviation of the optimalportfolio.(5 points)

Expected return 14.0112%

Standard deviation18.9075815%

=SQRT(.6704^2)(.25^2)+(.3296^2)(0.2^2)+2*.6704*0.3296*.15*.2*.25

1. If the investor wants an expected return of 18% from a complete-portfolioCformed byusing theoptimal-portfolioPand risk-free rate, what proportion of X, Y, and risk-free asset should the investor invest inthecomplete portfolio?(5points)

1. What is the standard deviation of theabovecomplete-portfolioCthat provides 18% return?

(5 points)

1. What are the reward-to-riskratiosof theoptimal-portfolioPand thecomplete-portfolioC?Explain your results. Why they are same or different.Providean argument byreflecting onthe capital allocation line/s on whichthepositions of C andPcan be plotted.(5points)