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| State of the Economy | Probability | HPR (Fund A) | HPR (Fund B) |
| Boom | .50 | 7% | 25% |
| Normal growth | .3 | -5% | 10% |
| Recession | .2 | 20% | -25% |
1. What are the expected holding period returns for Fund A and Fund B?
2. What are the expected standard deviations for Fund A and Fund B?
3. What are the covariance and correlation coefficient between the returns of Fund A and Fund B?
4. Now using Fund A and Fund B to construct our optimal risk portfolio P, what are the weights for Fund A and Fund B if risk free rate is 4.25% ?
5. What are the expected return and Standard Deviation of the optimal risky portfolio P?
6. What is the Sharpe Ratio (Reward-to-Variability) of the CAL line that joins the risk-free asset and optimal risky asset P?
7. If your risk aversion index A = 4, what is your optimal allocation between risky asset P (y) and risk-free asset (1-y)?
8. What are expected rate of return and standard deviation of your complete portfolio that is constructed with risky asset P and risk-free asset?
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