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# 1. Consider an investor with $1 of wealth. He has to compose a portfolio with the... ###### Question: 1. Consider an investor with$1 of wealth. He has to compose a portfolio with the following two risky assets. The rates of returns from those assets are specified by expectations, variances and correlations.
var[r 1] = 0.02 E[r 1] = 0.05 var[r 2] = 0.03 E[r 2] = 0.08 corr[r 1, r 2] = 0.7
(a) Draw an efficient frontier of the investor.
(b) How will the mean-variance efficient frontier in (a) change if corr[r 1, r 2] = 1?
(c) How will the mean-variance efficient frontier in (a) change if corr[r 1, r 2] = −1?
(d) In (c), what would happen in the financial market if the risk-free rate is 0.06? Does the investor has an incentive to buy the risk-free asset?
(e) Return to the assumptions of (a). In addition, suppose that the risk-free asset is available at the rate of 0.03. Then, how the efficient frontier will change? In other words, find a CML(Capital Market Line).

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