Question 2

i)

Given a simple world with two assets, a bond fund and a s

tock fund, clearly detail the steps involved in arriving at the 1) efficient frontier, and 2) market (optimal) portfolio.

ii)

What is the significance of the Capital Market Line? To be more specific, what

relationship does this line depict? Give a brief discussion on its application.

iii)

One important assumption behind portfolio theory is that investors are "mean-variance maximizers."What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier.