Suppose that there are two assets, A and B, and their returns are derived by the two-factor model below:

= + _{1 1} + _{2 2} +

The first factor has an expected rate of return of I₁=15% and a standard deviation ₁=3%. The second factor has an expected rate of return of I₂=24% and a standard deviation ₂=10%. The returns between the two factors and the returns between the idiosyncratic component of each asset and each factor are uncorrelated. The risk-free rate of return is RF = 4%. The table below summarises the coefficients , ₁ , ₂ and the standard deviation of the error term for each asset:

		1	2
ASSET A	0.5%	0.5	0.5	22%
ASSET B	2.0%	-0.2	1.2	13%

a. Estimate the expected returns and the standard deviation of returns for the two assets.

b. Find the optimal risky portfolio and calculate its expected return and its standard deviation of returns