Question: Using the data in the table, answer the questions that follow. Asset Expected Return Standard Deviation Stock Fund S 18% 30% Bond Fund B 9%

Using the data in the table, answer the questions that follow.

Asset	Expected Return	Standard Deviation
Stock Fund S	18%	30%
Bond Fund B	9%	20%
T-Bills	5%	--

The correlation coefficient between the stock fund S and the bond fund b is 0.15.

C. What are the approximate proportion of stocks and bonds in the optimal risky portfolio? (Hint: this will be the portfolio with the highest Sharpe ratio)

D. If you target return is 12%, what will be the proportions of stocks, bonds and the risk free asset in the complete portfolio? What will be the standard deviation of that portfolio? (Hint: this portfolio has to be on the capital allocation line and will have the same Sharpe ratio as calculated in (C)).

E. Suppose the risk free asset (T-BIlls) is not available. What is are the proportions of stocks and bonds in a portfolio with an expected return of 12%? What is the standard deviation?

F. Compare and comment on the answers in D and E.

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