You decide to construct a complete portfolio (C) with three assets: a stock fund (S), a bond fund (B), and the T-bill (risk-free). The expected return and standard deviation of Fund S are 14% and 18%, respectively. The expected return and standard deviation of Fund B are 8% and 12%, respectively. The correlation between Funds S and B is 0.4.

The T-bill currently earns 5%. Your risk aversion (A) is 4.

1. (1 point) Determine the optimal risky portfolio (O) of S and B, i.e., wS* and wB*.
2. (1 point) It turns out that the expected return and standard deviation of the optimal risky portfolio (O) are 13% and 16%, respectively. Calculate the proportion of the optimal risky portfolio (O) in your complete portfolio (C).
3. (1 point) What is the overall asset allocation (= % of S, B, and T-bill) of your complete portfolio (C)?
   • Show your calculation steps briefly and clearly.
4. (1 point) Consider a portfolio investing 20% in S, 20% in B, and 60% in T-bill. Determine whether this portfolio is on the optimal capital allocation line (CAL). Briefly explain why.