Question 2 (6 points)

You plan to construct portfolio using two risky assets S&P500 Index ETF (VFINX) and US 10-year Treasury-Bond ETF (IEF). Your fundamental research team provided you with the long-term expected return and risk as follows:

(1) Complete the investment opportunity set table by calculating portfolio expected return and standard deviation per the different combination of stock and bond weight.

o Set the stock index fund weighting range between -20% and 120% with 10% points interval (-20% means you short index fund to buy bond by 20%)

Investement Opportunity Set Table
Weight	Weight	Expected	Standard
Equity	Bonds	Return	Deviation
-20%	120%
-10%	110%
0%	100%
10%	90%
20%	80%
30%	70%
40%	60%
50%	50%
60%	40%
70%	30%
80%	20%
90%	10%
100%	0%
110%	-10%
120%	-20%

(2) If the two assets have a perfect negative correlation (i.e. = -1), approximately how much return can you achieve by constructing arbitrage portfolio with zero risk?

o For the answer, a single digit % number is enough (e.g. 8%).

S&P500 10 Year T-Bond ETF Index ETF 8.0% 3.0% Expected Return Expected Standard Deviation Correlation 22.0% 6.0% -0.20