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Question 5 (10 Marks) a. With reference to Figure 1 below, explain why the optimal risky portfolio is the point of tangency of the CAL

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Question 5 (10 Marks) a. With reference to Figure 1 below, explain why the optimal risky portfolio is the point of tangency of the CAL and the Investment Opportunity set. Investment Opportunity Set 16% CAL 15% 14% 13% 0.129 12% 11% 10% 9% 8% 7% 6% 0.25 Standard Deviation Expected Return 0.15 0.2 0.3 0.35 -Optimal risky portfolio Min-variance portfolio (7 marks)

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