Question: Asset Expected Return Standard Deviation Risky debt 6% 0.25 Equity 10% .60 Riskless debt 4.5% 0 The coefficient of correlation between the returns on the

Asset

Expected Return

Standard Deviation

Risky debt

6%

0.25

Equity

10%

.60

Riskless debt

4.5%

0

The coefficient of correlation between the returns on the risky debt and equity is 0.72

2A. Using the Markowitz portfolio optimization method, what would the composition of the optimal risky portfolio of these assets be? 10 points

2B. What would the expected return be on this optimal portfolio? 2 points

2C. What would the standard deviation of this optimal portfolio be? 3 points

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