Question 1 - Previously we showed that whenever there is a risk-free rate the efficient frontier collapses to the set of portfolios that are combinations of the risk-free rate and a single fund of risky assets. Explain carefully why this simplifies the portfolio selection problem of an individual with mean variance preferences.

Question 2- There are only two stocks A and B traded in an economy. Suppose that the correlation between the two assets A , B = 0 and that the risk free rate is zero. State and solve the tangency portfolio problem. (Hint: transform it to a one variable problem by using that the portfolio weights sum to one). Interpret the result.

Question 3 - Redo the problem above, but now assume that A , B = 1 , i.e., the assets are perfectly correlated. Interpret the result.