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You are evaluating various investment opportunities currently available for you and identified two mutual funds that you are interested in: equity (stock) fund and

  




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 Bond fund 15.12% 6.48% 12.24% 3.96% The correlation between the equity and bond funds is -0.2. a) Find the investment proportions (weights) of the optimal risky portfolio and compute its expected return and risk. [8 marks] b) 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.

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