You are an investor with an investment horizon of one year and a certain degree of risk aversion. Your task is to determine the efficient frontier in the case of two risky securities and one risk-free (T-bill) security and select the optimal portfolio depending on your risk-aversion parameter.

The following steps will help you accomplish this task:

a- Choose

• A well-diversified risky bond B represented by its E(RB) and STDB.
• A well-diversified stock fund S represented by its E(RS) and STDS.
• A) Choose your own bond and stock and parameters for a company in the real world.
• B) Choose the one-year risk-free rate to be 5%. Choose one of the following: (a) E(RB) = 9%, SD(B) = 14%, E(RS) = 14%, SD(S) = 20% (b) E(RB) = 10%, SD(B) = 15%, E(RS) = 16%, SD(S) = 22% (c) E(RB) = 12%, SD(B) = 16%, E(RS) = 20%, SD(S) = 25%.

b- Choose a correlation coefficient between B and S.

Choose your own correlation corresponding to Step 1 A.

For Step 1 B choose one of the following: (a) Corr(B,S) = 0.20 (b) Corr(B,S) = 0.30 (c) Corr(B,S) = 0.40

c- Make simulations on STD and E(R) of a "complete" portfolio (formed with B and S) by varying the weights allocated on B and S.

d- Construct and graph the opportunity set (feasible set) for B and S from your simulations.