You plan to invest $100 in a risky asset with an expected rate of return of 10% and a standard deviation of 20% and a risk-free asset with a rate of return of 2%.

1: What fraction of your money must be invested in the risky asset to form a portfolio with an expected return of 8%?

2: What would be standard deviation of the portfolio formed in part (a) be?

3: What fraction of your money must be invested in the risk-free asset to form a portfolio with a standard deviation of 5%?

4: What is the slope of the Capital Allocation Line (CAL) formed with the risky asset and the risk-free asset?

5: What is the intercept of the CAL?

6: Now suppose that the investor may still lend at a risk-free rate of 2%, but if needed, needs to borrow at 6%. What is the slope of the CAL over the segment that corresponds to borrowing?