Question
Selma is considering moving her retirement savings from a bank deposit to mutual funds. Kalla, her advisor, suggests a combination of two index funds, Fund
Selma is considering moving her retirement savings from a bank deposit to mutual funds. Kalla, her advisor, suggests a combination of two index funds, Fund E which includes all the stocks available in the market, and Fund B, which includes all traded outstanding bonds. E has an expected return of 12% and a standard deviation of 14%. B has an expected return of 4.5% and a standard deviation of 6%. The returns of the two funds exhibit a correlation of 0.4. The risk-free rate is 2% and all investors can borrow or lend at the risk-free rate.
a. Determine the composition of the optimal portfolio.
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