You are discussing your retirement plan with Emma Li when she mentions

that Maureen O'Brien, a representative from TD Financial Services, is visiting your oce

today. You decide that you should meet with Maureen, so Emma sets up an appointment for

you later in the day. When you sit down with Maureen, she discusses the various investment

options available in the company's retirement plan. You mention to Maureen that you

researched your new employer before you accepted your new job. Analysis of the company

has led to your belief that the company is growing and will achieve a grater market share

in the future. You also feel you should support your employer. Given these considerations,

along with the fact that you are a conservative investor, you are leaning toward investing

100% of your retirement amount in the company you now work for.

Assume the risk-free rate is the historical average T-Bill rate of 3.4%. The correlation

between the TD Large-Cap Stock Fund and the TD Bond Fund is 0.15. Note that the

spreadsheet graphing and \Solver" in Excel may assist you in answering the questions.

The standard deviation and average return of the funds over the past 10 years:

10-year average return Standard deviation

TD TSX Composite Index Fund 9.18% 20.43%

TD Small-Cap Fund 14.12% 25.13%

TD Large-Company Stock Fund 8.58% 23.82%

TD Bond Fund 5.45% 9.85%

1. How should Maureen respond to the suggestion that you invest 100 percent of your

retirement savings in the company you now work for? What about when you say that

you are a conservative investor and that a 100 percent investment in the bond fund

may be the best alternative. Is it?

2. Using the average returns and standard deviations for the TD Large-Cap Stock Fund

and the TD Bond Fund (see the table in Problem 1), graph the opportunity set of

feasible portfolios you can form from these two risky assets. Examining the opportunity

set, notice there is a portfolio that has the lowest standard deviation. What are the

portfolio weights, expected return, and standard deviation of this minimum variance

portfolio? Why is the minimum variance portfolio important?

3. What are the portfolio weights, expected return, and standard deviation of the tan-

gency portfolio? Using this information graph the capital allocation line alongside the

opportunity set of risky assets. How does the Sharpe ratio of the tangency portfolio