You are an investment manager considering two mutual funds. The first is an equity fund and the second is a long-term corporate bond fund. It is possible to borrow or to lend limitless sums safely at 1.25%pa. The data on the risky funds are as follows:

Fund	Expected return	Expected standard deviation
Equity Fund	8%	16%
Bond Fund	3%	5%

The correlation coefficient between the fund returns is 0.10

a You form a risky portfolio P that is equally weighted between the bond fund and the equity fund. Calculate the forecast expected return and the estimated risk of your portfolio. Show your working.

b Your client wants to invest a proportion of his total investment budget in your risky portfolio identified in part (a) to provide an expected rate of return on his complete portfolio equal to 8%.

1. What proportion should he invest in the risky portfolio and how should this be funded?

2. What is the risk of his combined portfolio?

3. Mark this portfolio onto your portfolios CAL. Show your working.