Problem 4: The Efficient Frontier and the CAL 20 points Consider the case of 2 risky assets. Asset I has an expected return of 18.0% and a standard deviation of 22.0%. Asset 2 has an expected return of 8.0% and a standard deviation of 10.0%. The correlation coefficient for the two assets is 0.30. The return on the risk-free asset is 4.5% [2 points] What is the covariance of Assets 1 and 2? [3 points] What are the expected return and standard deviation of a portfolio composed of 70% Asset 1 and 30% Asset 2? Refer to this portfolio as the "(70.30) portfolio." [3 points] What are the expected return and standard deviation from allocating our wealth 25% to the risk-free asset and 75% to the(70,30) portfolio in Step #2? [3 points] What is the slope of the line formed by all possible combinations of the risk-free asset and the (70,30) portfolio? [3 points] What portfolio (selected from all the possible combinations of Asset 1 and 2) forms the best possible Capital Allocation Line? The correct answer will define the portfolio according to the weights, e.g. (wi,W2)-(70,30) [3 points] What is the slope of the Capital Market Line (CML)? [3 points] What are the expected return and standard deviation of a portfolio that invests-20% in the risk-free asset and the remainder of the portfolio in the optimal portfolio found in Step #5? 1. 2. 3. 4. 5. 6. 7