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    Answer: C

    NEW QUESTION: 2
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    NEW QUESTION: 3
    Millennium Investments (MI), an investment advisory firm, relies on mean-variance analysis to advise its clients. Mi's advisors make asset allocation recommendations by selecting the mix of assets along the capital allocation line that is most appropriate for each client.
    One of MPs clients, Edward Alverson, 60 years of age, requests an analysis of four risky mutual funds (Fund W, Fund X, Fund Y, and Fund Z). After examining the four funds, MI finds that all four mutual funds are equally weighted portfolios, and that all of the funds, except Fund Z, are mean-variance efficient. MI also finds that the correlations between all pairs of the mutual funds are less than one.
    MI calculates the average variance of returns across all assets within each mutual fund, the average covariance of returns across all pairs of assets within each mutual fund, and each mutual fund's total variance of returns. The results of Mi's calculations are reported in Exhibit 1.

    During his meeting with the MT advisors, Alverson explains that he will retire soon, and, consequently, is highly risk-averse. Alverson agrees with Mi's reliance on mean-variance analysis and makes the following statements:
    Statement 1: All portfolios lying on the minimum variance frontier are desirable portfolios.
    Statement 2: Because I am highly risk-averse, I expect that my investment portfolio on the capital allocation line will have risk and return equal to that of the global minimum variance portfolio.
    MI operates under the assumption that all investors agree on the forecasts of asset expected returns, variances, and correlations. Based on these assumptions, MI created the Millennium Investments 5000 Fund (MI-5000), which is a market value-weighted portfolio of all assets in the market. MI derives the forecasts for the MI-5000 Fund and for a fund comprising short-term government securities shown in Exhibit 2.

    Given the data in Exhibit 2 and Mi's determination that Alverson's investment portfolio should have a standard deviation equal to 12%, what is the highest possible expected return for Alverson, and what percentage should Alverson invest in the MI-5000 fund?
    Highest expected ;Percentage invested
    Return in MI-5000
    A. 9.2% ;60%
    B. 7.2% ;60%
    C. 7.2% ;40%
    Answer: A
    Explanation:
    Explanation/Reference:
    Explanation:
    The highest returns for each level of risk are provided along the capital market line:

    The appropriate weighring can be determined by recalling the formula for the standard deviation of an investment that combines a risky asset (i.e., the MI-5000) and a risk-free a

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