Question 1: Consider the following data:

Problem Set 5 Foundations of Finance Due Date: 26 October. 2020

Expected Return 0.16 = 16% 0.14 = 14% 0.12 = 12%

Standard Deviation 12%

A Fund B Fund C Fund The correlation between the returns on the A Fund and the C Fund is .7. The rate on T-bills (which will represent the risk free asset) is 6%. Which of the following portfolios would you prefer to hold in combination with T-bills and why? (a) A Fund

(b) B Fund (c) C Fund (d) A portfolio of 60% in the A Fund and 40% in the C Fund.