You have decided to invest in three mutual funds: one in equities, one in long corporate and government bonds, and a money market fund invested in T-bills yielding 7%. Your estimate of the relevant parameters for the equities and bond funds are as follows:

	Expected Return	Standard Deviation
Equities	.18	.28
Bonds	.08	.12

The correlation between the fund returns is 0.15.

E(Re) = 18% (e) = 28% P(e,b) = 0.15

E(Rb) = 8% (b) = 12% Rf = 7%

1. Determine the weights of the minimum-variance portfolio of the two risky funds, and its expected return and standard deviation.
2. Determine the weights of the optimal risky portfolio of the two risky funds, and its expected return and standard deviation.
3. Determine the best feasible CAL and calculate its reward-to-volatility ratio.
4. Without the money market fund, what would be the weights of a portfolio on the best feasible CAL, composed of the equities and bond funds which would be expected to return 12%, and what would be its standard deviation?
5. Finally, adding the money market fund to your risky portfolio, determine the weights of a portfolio yielding 12% overall, and calculate its standard deviation.
6. Compare the portfolios in #4 and #5. Is this consistent with what you would expect when adding the T-bill money market fund as essentially the risk-free asset?