= Problem 1. Finding tangency portfolio] Suppose we have two risky assets with the same variance o2 = 1. The correlation of these two assets is p = 0.5. The expected return for asset 1 is R1 = 1.3 and for asset 2 is R2 1.1. Assume the risk-free return is Rf = 1.05. (a) Plot the minimum variance set. (b) Use the fact that the Sharpe ratio is maximized at the tangency portfolio to show that the tangency portfolio has the following form: (R1 - R2) - (1 - p) (R2 Rf) (1 p) (R1 Rp + R2 Rf) W2 (c) Find the numerical value of tangency portfolio (W1, wa). Does short-selling happen? Explain your results. If no short-selling is allowed, what is the tangency portfolio? (d) Suppose RF 1.25. What is the tangency portfolio? Does it make any sense? Explain. W1 = 1-wi = = Problem 1. Finding tangency portfolio] Suppose we have two risky assets with the same variance o2 = 1. The correlation of these two assets is p = 0.5. The expected return for asset 1 is R1 = 1.3 and for asset 2 is R2 1.1. Assume the risk-free return is Rf = 1.05. (a) Plot the minimum variance set. (b) Use the fact that the Sharpe ratio is maximized at the tangency portfolio to show that the tangency portfolio has the following form: (R1 - R2) - (1 - p) (R2 Rf) (1 p) (R1 Rp + R2 Rf) W2 (c) Find the numerical value of tangency portfolio (W1, wa). Does short-selling happen? Explain your results. If no short-selling is allowed, what is the tangency portfolio? (d) Suppose RF 1.25. What is the tangency portfolio? Does it make any sense? Explain. W1 = 1-wi =