Consider two stocks (1 and 2) with expected returns E[r1] =10% and E[r2]

=12%, standard deviations 1=10% and 2=15% and a correlation of 0.5. The risk-free rate

in the economy is 5%. Now consider four portfolios A, B, C, and D that are constructed by

investing in stocks 1 and 2, as well as the risk-free asset. The portfolios have the following

expected returns E[rP] and standard deviations :

A B C D

E[rP] 7.85% 10.7% 10.9% 10.2%

5.1% 10.2% 12% 9.8%

It is known that one of these portfolios is a tangency portfolio and D is the minimum variance

portfolio (i.e., a portfolio that invests in only stocks 1 and 2 and has the lowest variance

among all portfolios of stocks 1 and 2). Identify the tangency portfolio and its weights in

stocks 1, 2, and the riskless asset.