Question: Consider a single-step market model with n = 2 risky assets, where returns and covariances are given by 1 = 5%, 2 =2%, 2 1

Consider a single-step market model with n = 2 risky assets, where returns and covariances are given by

Consider a single-step market model with n = 2 risky assets, where ₁ = 5%, returns and covariances are given by 1 = 5%, 2 =2%, 21 ₂ =2%, = 5%, 22= 2%, c12 = 3%. i) What is the condition ²₁ = 5%, on i, i, c12 ensuring that the minimum variance portfolio does not ²₂= 2%, c₁₂ = 3%.

i) What is the condition on _i, _i, c₁₂ ensuring that the minimum variance portfolio does not require short selling? State your answer in a form of a theorem and prove it.

ii) Can your theorem be simply generalized to the case of more than two assets? Justify your answer.

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