There are only two funds to invest in the market, a stock fund and a bond fund. The expected rate of return and volatility of this stock fund are 10% and 20%, respectively. The expected rate of return and volatility of this bond fund are 5% and 15%, respectively. The correlation between both funds is 0.2.

1. Investor D wants to create a portfolio D with a target expected return of 7%. Compute the composition and volatility of portfolio D.

2. Compare expected returns and standard deviations of investment in 100% portfolio D vs 100% in bond fund. Which portfolio outperforms the other? Describe shortly why the standard deviation of portfolio D could be lower than the standard deviation of bond fund.