You are asked to consider three mutual funds. The first is a stock fund, the second is a longterm government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 8%. The probability distribution of the risky funds is as follows:

The correlation coefficient between funds S and B is 0.10. What is the most optimum complete portfolio would you recommend? Show your thought process by solving all of the following consecutively.

a. Draw the opportunity set of funds S and B.

b. Find the optimal risky portfolio, P, and its expected return and standard deviation.

c. Find the slope of the CAL supported by T-bills and portfolio P.

d. How much will an investor with A=5 invest in funds S and B and in T-bills?

Stock Fund (S) Bond Fund (B) Expected Return 20% 12% Standard Deviation 30% 15%