Consider a two-asset model with money paying the positive given interest rate Rm and the bonds paying a return R which has the expected value μb and standard deviation σb.

Show diagrammatically the effects of the following for the proportions held of the two assets:

i. The government imposes a tax on the excess return (R – Rm) on bonds, with a corresponding refund if the return is negative.

ii. The government imposes a tax on a positive excess return (R – Rm) on bonds, but without any refund if the return is negative.

iii. Show the effects for the above cases if Rm= 0.