A consequence of the above results is that there is so-called two fund separation in the market in the sense that all investors (regardless of their risk aversion) will choose some combination of the two portfolios (funds) wA and wB. This is a classical result! 3. Portfolio optimization with risk-free asset: Now assume that in addition to the risky assets described above with expected return vector and positive definite variance-covariance matrix , there is a risk-free asset with deterministic return R>0. We can think of this asset as a one-year treasury bond, or alternatively as a certificate of deposit (CD) in a bank. Consider a portfolio of hRN in the risky assets, and the remaining 1hT1 in the risk-free asset. You can verify that the expected return on this portfolio is R+hT(R1), and that the variance is (as before) hTh. The case when hT1>1 corresponds to a situation when money is borrowed from the bank to invest in the market. The case when hT1