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You are considering how to allocate your fund between the following two indices: an equity index...

You are considering how to allocate your fund between the following two indices: an equity index (E) and a government bond index (D). The expected rate of return is 15% and the standard deviation of return is 20% for the equity index, E. The expected rate of return is 6% and the standard deviation of return is 10% for the government bond index, D. The return correlation between the two indices, E and D, is 0.50.

  1. On a two-dimensional diagram with the standard deviation of return on x-axis and the mean return on y-axis, draw an accurate figure of the portfolio opportunity set constructed with the two indices, E and D. Indicate the locations of E and D on your figure.
  2. What are the weights on the indices, E and D, consisting of the minimum variance portfolio (MVP)? What are the expected rate of return and the standard deviation of return for MVP? Indicate the efficient frontier and the location of MVP on the figure you produced in Question 11.
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