You are evaluating two investment alternatives. One is Fund P with an expected return of 10% and a standard deviation of

16%. The other is a fund that is actively managed (Fund Q). This fund has an expected return of 15% and a standard

deviation of 20%. The risk-free rate is currently 7%. Answer the questions below based on this information.

a. What is the slope of the Capital Allocation Line of P

(combine the riskfree asset with P)?

b. What is the slope of the Capital Allocation Line of Q?

c. Draw the two Capital Allocation Lines in one graph.

d. If the only two investment choices available were to

invest in a portfolio of the risk-free asset with either

Fund P or Fund Q, what advice would you give to a

mean-variance investor?