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. You need to do your work on a spreadsheet (use one that you are comfortable with).

The following steps will help you accomplish this task:

1- Choose

• A well-diversified risky bond B represented by its E(R_B) and SD(B).
• A well-diversified stock fund S represented by its E(R_S) and SD(S).
• A T-bill with one-year maturity represented by R_F.

Choose the one-year risk-free rate to be 5%. (a) E(R_B) = 9%, SD(B) = 14%, E(R_S) = 14%, SD(S) = 20%

2- Choose a correlation coefficient between B and S.

Choose one of the following: (b) Corr(B,S) = 0.30

3- Make simulations on standard deviation SD(P) and expected rate of return E(R_P) of a "complete" portfolio (formed with B and S) by varying the weights allocated on B and S.

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

5- Compute the weights of the tangent portfolio (T).

6- Compute the SD(T) and E(R_T) of the tangent portfolio (T).

7- Add the T-bill to your portfolio and redo step 3.

8- Repeat step 4 with the T-bill rate.