Using question 3a) Answer the three parts of 3b

Question 3 (Total: 12 points) You are given the following information about a risk free asset and the Mean Variance Efficient Portfolio (MVEP): Rf=5%,E[RMVEP]=15%and(RMVEP)=15% Answer the following questions. (Note: they can both be answered independently of each other) (a) (6 points) A friend of yours is investing all her wealth on what she believes to be a "great" portfolio. This portfolio, call it OMEGA, has the following characteristics: E[ROMEGA]=10%and(ROMEGA)=10% Convince your friend that this portfolio is actually not that "great" because it is not efficient. In particular, show her that she can do better than this portfolio by proposing to her an efficient portfolio (call it P1) that has the same standard deviation of portfolio OMEGA but higher expected return. You must show clearly why this portfolio is better (i.e. find the expected return of portfolio P1 and compare it with the expected return of the OMEGA portfolio) and how you would create it (i.e. find the proportion that you should invest in each security to create this new portfolio P1) Question 7 3/3pt Question 3a In order to generate the same standard deviation of OMEGA, what should be the weight invested in MVEP, XMVEP ? (Round to 3 decimal places) Given the weight, what is the expected return (in percentage, round to 2 decimal places)) of your portfolio P1? You know that A is 5 . Calculate the fraction that your friend should invest in the risky security in the optimal portfolio XMVEP. What is the expected return (in percentage, round to 2 decimal places)) of the optimal portfolio? What is the standard deviation (in percentage, round to 2 decimal places)) of the optimal portfolio