Consider an investor who uses the mean-variance model to select his or her optimal portfolio. This investor seeks to allocate $600,000 among three assets: (1) Treasury bills; (2) bonds; and (3) stocks. Treasury bills earn a rate of 1% (assumed to be risk-free).

The investor obtained the following weights of the tangency portfolio: bonds, 55%; and stocks, 45%. The tangency portfolio has an expected return of 6% and a standard deviation of 10%.

Suppose that the investor seeks to have a standard deviation of 2%. Find the optimal dollar investments in:

a. Treasury bills;

b. Bonds; and

c. Stocks.

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