Suppose that there are 2 assets with r1 = 0.20; 1 = 0.40; r2 = 0.10; 2 = 0.25; 12 =

0.05, where 12 is the correlation of returns between asset 1 and asset 2.

(a) If r0 = 0.02, what are the market portfolio return and variance? What are the

corresponding weights (i.e. how much to invest in asset 1, asset 2, and the risk-free

asset to get the market portfolio)?

(b) If r0 = 0.05, what are the market portfolio return and variance? What are the

corresponding weights?