Suppose there are only two risky funds in the capital market: a stock fund (S) and a bond fund (B). The expected return and standard deviation of the stock fund is 20% and 25%, respectively, and the expected return and standard deviation of the bond fund is 4% and 15%, respectively. The correlation between the returns of the stock and bond funds is .21.

1. Compute the expected return and standard deviation of the optimal risky portfolio (P) if you, a portfolio manager, can lend or borrow at the risk-free rate of 2%. Show all computations.
2. You propose to allocate part of your client Daves money to the optimal risky portfolio (P) managed by you, and the rest to the risk-free asset. Calculate the optimal weight (%) of the optimal risky portfolio (P) in Daves complete portfolio (C), assuming Daves utility function is E(r_p) 0.5As_p²,where A = 4. Show all computations.