Question: Initial assets: Asset A: Mean = 20% Standard Deviation = 10% Asset B: Mean = 10% Standard Deviation = 5% Now assume that there is

Initial assets:

Asset A: Mean = 20% Standard Deviation = 10%

Asset B: Mean = 10% Standard Deviation = 5%

Now assume that there is a risk free asset. The risk-free rate (for borrowing and for lending) is4%. The expected return of the market portfolio (= tangency portfolio, optimal risky portfolio) is14%.

(i)What is the standard deviation of the market portfolio?

(ii)Plot (sketch) the efficiency frontier (the optimal investment opportunity set).

(iii)What is the minimal standard deviation of a portfolio that has expected return of 12%?

(iv)What is the minimal standard deviation of a portfolio that has expected return of 18%?

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