Suppose that investors can invest into three assets that earn the following expected returns:

Asset 1: 0.09

Asset 2: 0.12

Asset 3: 0.14

and have the following standard deviations (on the diagonal, in bold) and cross-correlations (below the diagonal):

Asset 1 | Asset 2 | Asset 3 | |

Asset 1 | .2 | ||

Asset 2 | .2 | .32 | |

Asset 3 | .85 | .35 | .3 |

- Using Solver in Excel, construct the (unconstrained) efficient frontier of the three assets. In particular, construct the global minimum-variance portfolio and efficient portfolios with 8%, 9%, 10%, 12%, 14%, 16% and 18% rate of expected return.
- Consider again a setting where short-selling is allowed and assume that investors, in addition to the three risky assets, can also invest in a risk-free asset that pays 2%. Construct the optimal risky portfolio (i.e., the tangency portfolio) and compute its Sharpe ratio.
- Consider a mean-variance investor with risk aversion of 5. What portfolio such an investor would choose to hold?
- Reconsider part (e) and suppose that investing in Asset 2 is no longer possible â€”that is, suppose that investors have access to risky Assets 1 and 3, and the risk-free asset. Construct the tangency portfolio in this case. What is the Sharpe ratio of the constructed tangency portfolio?