(a) Consider the following two assets whose correlation is 0.3:

Asset A has expected gain of 10% and standard deviation of 10%.

Asset B has expected gain 30% and standard deviation of 30%

Derive the efficient frontier for these two assets (preferably in R following the example in notes but it is not compulsory). Hence, find the portfolio with the minimum variance (MVP).

(b) Consider the MVP found in (a) and a risk free asset C with expected gain of 2%. Show that if P and P are the expected gain and standard deviation of the combined portfolio of MVP and asset C, then P =c1+c2P,

where c1 and c2 are constants to be found.

(c) Explain how would a person choose to invest their fund among assets

A, B and C if they were (i)risk-averse, (ii) risk-loving, (iii) risk-neutral