Question 2 a. When risk free borrowing and lending at different rates is allowed, a more and a less risk averse investor can end up having the same optimal portfolio on the efficient frontier. Is this statement true or false? Describe this efficient frontier and discuss. (10 marks) b. Investors are only allowed to lend at a risk-free rate. Show the efficient frontier in such an environment and explain whether all investors have to invest a proportion of their funds in the risk-free asset. (7 marks) c. Assume that risk free lending and borrowing is allowed. The optimal portfolio of risky assets (tangency) is composed of Debt and Equity, which have the following characteristics: Expected return (%) Standard Deviation (%) Equity 15 18 Debt 7 10 Covariance Equity, Debt 18 The value of the risk-free rate is 4% i. What is the weight of equity and debt in the tangency portfolio? (3 marks) ii. What is the expected return and standard deviation of the tangency portfolio? (3 marks) iii. If an investor holds a portfolio with 13% standard deviation on the efficient frontier in this case, what is his expected return?