You survey a client and you conclude that she can tolerate a standard deviation T of at most 12%. You can allocate your clients wealth into a corporate bond fund, a common stock fund, and a U.S. T-Bills (risk -free), with the following means and standard deviations:

	ERi	i
Bond fund (B)	15%	17%
Common stock (S)	21%	35%
U.S. T-Bill (rf)	9.5%	0%

The correlation between the stock fund and the bond fund is B,S=0.7.

Find the optimal risky portfolio (5 points)

wB= ________% wS= ___________%

Find the expected return and risk of the optimal risky portfolio (5 points)

E(Rrisky)= ________% risky= ___________%

Draw the Capital Allocation Line of the optimal risky portfolio. (5 points)

Clearly identify the risk and return of the optimal risky portfolio

Clearly identify the risk free rate

Find the Sharpe ratio of this CAL

Risk ()

Expected return E(R)

SCAL=

Find the weights your client should allocate into the bond fund (wB), the common stock fund (wS), and into the risk-free asset (wf). (Remember that wB+wS+wf = 1). (5 points)

wB= ________%

wS= ___________%

wrf= ___________%

Finally, find the return of the portfolio that you found in e). Verify that the standard deviation of the risky portfolio is exactly 15%. (5 points)

E(Rfinal)= ________% final= ___________%