a) We have a financial market consisting of two risky assets. Assume that µ1 = 0.1, µ2 = 0.05, σ1 = 0.2 and σ2 = 0.15. If you know that the expected return of the minimum variance portfolio is larger than 7%, find the possible values of the correlation ρ12.

b) We have a financial market with one risk-free and two risky assets. Assume that µ1 = 0.1, σ1 = 0.2, σ2 = 0.15, Cov(K1, K2) = −σ1σ2 and R = 5%. Find µ2 such that there is no arbitrage on the market. (Hint: Construct a portfolio of the two risky assets with variance 0)

c) We have a financial market with one risk-free and two risky assets. Assume that µ1 = 0.1, µ2 = 0.12, σ1 = 0.05, σ2 = 0.10 and R = 5%. You are allowed to invest in the risk-free asset and only one of the risky assets. Which of the risky assets would you choose? What if the risk-free return was R = 10%?