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3. (7pts) Consider the portfolio selection problem in a market with N(2) risky asset and one risk free asset that earns return rate rf. The
3. (7pts) Consider the portfolio selection problem in a market with N(2) risky asset and one risk free asset that earns return rate rf. The expected returns of the risky assets are given by RN 1 and the covariance matrix of their returns is given by RNN. Assume is positive definite. Consider the problem {maxwRNs.t.{rf+wT(1rf)}wTw=p2, where rf+wT(1rf)=wT+(1wT1)rf is the expected return of the portfolio w. (a) Let p denote the expected return rate of the optimal portfolio for the above problem. Show ip=pprf[pcov(Ri,Rp)p] where Ri denotes the return rate of the i-th risky asset, and Rp is the return rate of the optimal portfolio
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