Your boss now informs you that the 11% target return portfolio you have constructed is not as ‘efficient’ as it might be as you have forgotten all about the risk-free asset... oopsy daisy!

You quickly do some research and determine that the appropriate risk-free rate to use is 0.75% per annum. Perform the following tasks to adjust your portfolio weights. All figures should be annualized.

2. (a) Construct and plot the MVS (with short sales allowed) for the seven stocks plus the risk-free asset. Illustrate its tangency property graphically by plotting the risky-security-only MVS from 1.(e) on the same set of axes. The figure should contain two MVSs (a bullet and a line), seven points representing each of the seven stocks a point representing the tangency portfolio.

(b) Report the tangency portfolio’s weights, expected return, and standard deviation of returns.

(c) Determine and report the new portfolio weights in the seven stocks plus the risk-free asset for the new efficient portfolio with an 11% expected return.

(d) Calculate and report the reduction in risk of the 11% returning efficient portfolio that can be achieved by adding the risk-free asset to the portfolio of seven stocks.

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