Stock X Stock Y

E(R) = 15 percent. E(R) = 10 percent.

Standard Deviation = 25%. Standard Deviation =15%.

Coefficient of Correlation between X and Y = 0 percent.

The risk-free rate is 5 percent.

a. Draw the opportunity set formed with X and Y. Assign M to the global minimum variance portfolio. How do you call the Part XM?

b. Draw a tangent from the risk-free rate to the opportunity set. Call the tangency point "P". Assume that P is constructed with 65 percent in X and 35 percent in Y.

c. Calculate the expected return and standard deviation of P.

d. What is the name of the tangent line?

e. What is the equation of the tangent line?

f. Assume your optimal portfolio C constructed with P and Rf earns an expected rate of return of 12.5 percent. Calculate the weights of P and Rf in C.

g. What are the weights of the risk-free security, X, and Y in your optimal portfolio C?

h. Calculate the standard deviation of your optimal portfolio C.

i. If you need to construct the same portfolio C with only X and Y and obtain the same expected rate of return as in (f) above, What are the weights of X, and Y in your optimal portfolio C?

j. What would the standard deviation of this portfolio be?