U.S. stocks have an expected return of 10% and a standard deviation of 20%. Foreign  stocks have an expected return of 15% and a standard deviation of 30%. The  correlation between the two markets is 25%. The risk-free borrowing and lending  interest rate in the U.S. is 5%.

 
a. Plot the portfolio frontier of portfolios, which consist of the domestic and foreign  stocks.

b. Which portfolio including just domestic and foreign stocks has the minimum variance?

c. Which portfolio including just domestic and foreign stocks should an investor hold to  optimize the tradeoff between risk and return? Does this portfolio depend on the risk  aversion of the investors?

d. Can you think of reasons why different investors might hold different portfolios of risky assets than the tangency portfolio suggested by portfolio theory?