Question 1
You are considering investing in Assets A and B with the following returns and standard deviations (of return):
E(r) SD
A 8% 24%
B 4% 28%

a) Suppose risk-free interest rate (rf) is zero.
Under what conditions would you, being risk-averse, consider holding both assets in your portfolio? [Hint: A complete answer would require numerical, graphical and a bit of verbal analyses.]

b) Now suppose the risk-free rate (rr) is positive.How would that change your answer to part (a). [Hint: A simple graph with proper labeling and some simple explanations should answer the question completely.]