You must allocate your wealth between two securities. Security 1 offers an expected return of 10% and has a standard deviation of 30%. Security 2 offers an expected return of 15% and has a standard deviation of 50%. The correlation between the returns on these two securities is 0.25.

a. Calculate the expected return and standard deviation for each of the following portfolios, and plot them on a graph:

% Security 1	% Security 2	E(R)	Standard Deviation
100	0
80	20
60	40
40	60
20	80
0	100

b. Based on your calculations in part (a), which portfolios are efficient and which are inefficient?

c. Suppose that a risk-free investment is available that offers a 4% return. If you must divide your wealth between the risk-free asset and one of the risky portfolios in the preceding table, which risky portfolio would you choose? Why?

d. Repeat your answer to part (c) assuming that the risk-free return is 8% rather than 4%. Can you provide an intuitive explanation for why the optimal risky portfolio changes?