V$.$ Modern Portfolio Theory

How does diversification allow us to reduce portfolio risk? Explain

using the formula for portfolio variance.

What is meant by an optimal portfolio? How is it related to an efficient

portfolio?

A portfolio manager has derived tangency portfolio with $E(r_T)=16\%$

and ${}_T=17\%.$ The risk$-$free T$-$bill rate is $8\%.$

$($a$)$ What is the equation for the best feasible CAL?

$($b$)$ You want your portfolio to be efficient with the highest Sharpe

ratio. Furthermore you want an expected return of $14\%$ on your

portfolio. What is your portfolio standard deviation?