State of the Economy	Probability	HPR (Fund A)	HPR (Fund B)
Boom	.50	7%	25%
Normal growth	.3	-5%	10%
Recession	.2	20%	-25%

1. What are the expected holding period returns for Fund A and Fund B?

2. What are the expected standard deviations for Fund A and Fund B?

3. What are the covariance and correlation coefficient between the returns of Fund A and Fund B?

4. Now using Fund A and Fund B to construct our optimal risk portfolio P, what are the weights for Fund A and Fund B if risk free rate is 4.25% ?

5. What are the expected return and Standard Deviation of the optimal risky portfolio P?

6. What is the Sharpe Ratio (Reward-to-Variability) of the CAL line that joins the risk-free asset and optimal risky asset P?

7. If your risk aversion index A = 4, what is your optimal allocation between risky asset P (y) and risk-free asset (1-y)?

8. What are expected rate of return and standard deviation of your complete portfolio that is constructed with risky asset P and risk-free asset?