This question is related to financial economics. Please answer all parts of the question and show all your workings and explanations.

Olivia is an investor who has only two primary assets, asset A and asset B, in which to hold her wealth, which is normalised to be 1. Asset A has mean 17m = 4 and standard deviation 0,4 = 2, while asset B has mean m3 = 2 and standard deviation 03 = 1. Olivia can choose as her portfolio any mixture between the two assets dened by A, where A is the fraction of her wealth that is held in asset A (so a fraction 1 A is held in asset B). Portfolios are restricted to satisfy 0 S A g 1. Olivia has constant absolute risk aversion preferences, with absolute risk aversion parameter equal to R, and her expected utility of a portfolio with mean m and standard deviation 0 is given by 11(m, a) = m 923R. Olivia makes her portfolio decisions maximising this function. 1. Plot the two assets in the MSD graph. 2. Assume, for this question only that the correlation between the two assets is pAB = l. (a) Find the equation for the efficient portfolio curve. (b) Find Olivia's optimal investment strategy A", and the coordinates of her optimal portfolio, (m3, 03). (c) If R = %, what is Olivia's optimal portfolio? 3. Now, assume for this question only that pAB = 1. (a) Find the equation for the efficient portfolio curve. (b) Find Olivia's optimal investment strategy X', and the coordinates of her optimal portfolio, (m3, 0;). (c) If R = %, what is Olivia's optimal portfolio? 4. Finally, now assume for this question and the next one that p A B = 0. (a) Find the equation for the efficient portfolio curve. (b) Find Olivia's optimal investment strategy X', and the coordinates of her optimal portfolio, (mi, 0;). (c) If R = %, what is Olivia's optimal portfolio? What is Olivia's level of expected utility at her optimal portfolio? 5. Assume now that a risk-free asset appears on the market, with return of m f = %. Olivia can now divide her wealth between the two original assets and the risk-free asset. She does this by constructing the Capital Market Line corre- sponding to her new situation, and then choosing an optimal point along it. (a) Find the coordinates of the optimal risky portfolio, if, which is to be combined with the risk-free asset. (b) Find the mix of assets A and B that is needed to obtain the portfolio if. (C) Find Olivia's optimal point along the Capital Market Line as a function of R, including the fraction of wealth that she needs to dedicate to [TL-f in order to obtain her optimal position. (d) Assuming that R = %, what are the fractions of wealth that Olivia dedicates to (i) the riskfree asset, (ii) risky asset A, and (iii) risky asset B? (e) What is Olivia's level of expected utility at her optimal portfolio when R = %? Compare this with your answer to question 4(c) above, and comment on how valuable it is to Olivia to have access to the risk-free asset. Given the existence of the riskfree asset, how valuable is it for Olivia to have access to the risky assets A and B