You are an investor who is maximizing the expected return subject to not exceeding the maximum standard deviation you are willing to tolerate. There are 3 assets.

Asset 1 has an expected return of 10% and a standard deviation of 10%.

Asset 2 has an expected return of 7% and a standard deviation of 7%.

Asset 3 has an expected return of 3% and a standard deviation of 3%.

The correlation between asset 1 and asset 2 return is 0.5. The correlation between asset 1 and asset 3 return is 0.5. Finally, the correlation between asset 2 and asset 3 return is also 0.5.

a) Suppose the maximum standard deviation you are willing to tolerate is 6%. What are your portfolio allocations to assets 1, 2, and 3?

b) What is the standard deviation of the minimum variance portfolio? c) Suppose that, in addition to assets 1, 2, and 3, you now also have access to a risk-free asset with a risk-free rate of 0.3%. You can also borrow at the same rate. The maximum standard deviation you are willing to tolerate is still 6%. What are your portfolio allocations?