You are evaluating various investment opportunities currently available for you and identified two mutual funds that you are interested in: equity (stock) fund and long- term bond fund. You have calculated the expected returns and risks for the two funds as follows:

	Expected Return	Standard deviation
Equity fund	15.12%	12.24%
Bond fund	6.48%	3.96%

The correlation between the equity and bond funds is -0.2.

1. Find the investment proportions (weights) of the optimal risky portfolio and compute its expected return and risk.

2. Calculate the expected returns and risks for at least 4 portfolios that combine the two risky funds in different proportions and use them to graphically represent the efficient frontier.

3. With reference to Portfolio Theory, briefly explain what is meant by an efficient frontier. How would the efficient frontier in part b) look like if the correlation coefficient had been -1?

4. Assuming that you can invest in cash at 1.60% risk-free rate, sketch the new opportunity set (CAL) that includes the risk-free asset along with the optimal risky portfolio. Explain how you can move along the line.