Question: Problem 3: There are three assetswhich we label 1,2,3with excess returns, respectively, of 0.4, 0.4 and 0.8. All variances are equal to 2. The covariance

Problem 3: There are three assetswhich we label 1,2,3with excess returns, respectively, of 0.4, 0.4 and 0.8. All variances are equal to 2. The covariance between assets 1 and 3 is equal to zero, while all other covariances are equal to 1. Denote the return of asset i by r_i . Find the Minimum Variance Portfolio (MVP) and the Mean-Variance Efficient Portfolio (MVE), showing the full derivation in details. Then, assume that the risk free rate is 0.2, and find the weights of an efficient portfolio. Sketch a diagram to complement the answer.

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