Mean-Variance Analysis and the CAPM (25 points) Consider a world with exactly three assets: two are risky and one is risk-free. Assume all investors are rational and understand the features of the assets. While the exact preferences of investors differ, all investors care only about the expected return (which they want to be high) and variance (which they want to be low) of their portfolio over the next year and invest accordingly. Collectively, investors hold the supply of assets in the market. Returns refer to annual returns over the next year, there is no inflation. Risky asset 1 has a return with mean 10% and standard deviation 10%. Risky asset 2 has a return with mean 10% and standard deviation 20%. The returns of the two risky assets are independent. The risk-free asset has a return of 0%. c) What is the market" portfolio? (Explain what the market portfolio means generally in 1- 2 sentences and what share of the three assets are present in the market" portfolio in this case.) Assume the market capitalization of risky asset 1 is $1 billion. What is the market capitalization of risky asset 2? (Explain how you know in 1-2 sentences.) Mean-Variance Analysis and the CAPM (25 points) Consider a world with exactly three assets: two are risky and one is risk-free. Assume all investors are rational and understand the features of the assets. While the exact preferences of investors differ, all investors care only about the expected return (which they want to be high) and variance (which they want to be low) of their portfolio over the next year and invest accordingly. Collectively, investors hold the supply of assets in the market. Returns refer to annual returns over the next year, there is no inflation. Risky asset 1 has a return with mean 10% and standard deviation 10%. Risky asset 2 has a return with mean 10% and standard deviation 20%. The returns of the two risky assets are independent. The risk-free asset has a return of 0%. c) What is the market" portfolio? (Explain what the market portfolio means generally in 1- 2 sentences and what share of the three assets are present in the market" portfolio in this case.) Assume the market capitalization of risky asset 1 is $1 billion. What is the market capitalization of risky asset 2? (Explain how you know in 1-2 sentences.)