Suppose that there are 2 assets with r1 = 0:20; 1 = 0:40; r2 = 0:10; 2 = 0:25; p12 =0:05, where p12 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?