1. How would you describe a confidence interval to someone who does not understand statistics?

1a) Given the following, calculate the portfolio’s expected return, variance, and standard deviation.

Investment	E(R)	Std Dev	Weight	Correlation Coefficient
A	0.05	0.07	0.50	0.7
B	0.09	0.07	0.50

Assume the following changes occur.

Investment	E(R )	Std Dev	Weight	Correlation Coefficient
A	0.05	0.06	0.472	0.8
B	0.09	0.075	0.528

1b) As a Markowitz-efficient investor, which portfolio would you prefer, the original portfolio or this portfolio, and why?

1c) Once these changes occur, is this portfolio now riskless? Explain.

2) You have a portfolio of two assets, one with an expected return of 10% and a standard deviation of return of 9%, the other with an expected return of 10% and a standard deviation of return of 8%. Together, they have a covariance of -.0072. They are equally weighted in the portfolio.

Is it possible to create a riskless portfolio under these conditions. Why? Be as thorough as possible.

3a) In Capital Market Theory, what is the risk measure for an individual investment?

3b) Why is this so?

5) In Capital Market Theory, we assumed no transactions costs, which seemed unrealistic. However, there are instances where this assumption is not completely invalid. One such case is residential real estate, where only the seller typically pays a commission for a transaction. Assume the risk-free rate is

6%, sales commissions are 3%, and the SML is a positively-sloped line (i.e. normal). In words, graphs, or both, explain how this type of commission would alter the SML and the pricing of residential real estate assets