QUESTION 5. Now you want to combine the highest Sharpe ratio portfolio (the Optimal risky Portfolio O) you found out above with a risk-free asset to create a Portfolio C for your client to get an even more efficient portfolio. The risk-free asset, the 30-day U.S. Treasury Bills, provides a risk-free annual rate of return of 0.5%.

a) Suppose your client says her risk tolerance of 5%, what is the expected return and risk of her combined portfolio C?

b) How much weight (your clients wealth distribution) should you put into Portfolio O (the risky asset) and in the risk-free asset in the above situation to create Portfolio C?

c) How does the weight in each asset (Equity, Bond & the risk-free rate) in portfolio C look like? Give the interpretation on the portfolios weights for 100$ investment in portfolio C.