Suppose you are forming a portfolio with Company A and Company B, which have expected returns and covariance matrix as in Q4 tab of hw2.xls.

c. What range of portfolio weights produces inefficient portfolios?

d. Now, suppose you can save/borrow at the risk-free rate of 3%. What is the expected return and volatility of the tangent portfolio, and what are its portfolio weights?

B C D E F G H J K L M N O P Q R S T 1 10% 15% 2 Expected Return 3 Company A 4 Company B 5 6 7 Covariance matrix 8 A B 9 . 0.0144 0.0066 0.0066 0.0484 10 B 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Q1 Q3 Q4 B C D E F G H J K L M N O P Q R S T 1 10% 15% 2 Expected Return 3 Company A 4 Company B 5 6 7 Covariance matrix 8 A B 9 . 0.0144 0.0066 0.0066 0.0484 10 B 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Q1 Q3 Q4