Problem
1. Recall that in the discussion of demand for risky assets with more than one risky asset, we asserted that it was possible that an asset could have an expected return less than τ and still be demanded and that an asset could have an expected return greater than τ and not be demanded at all. (Recall that we are not allowing short-sales of risky assets.) Produce examples to support these claims. (Hints: For the first example, recall that you want negative correlation between the returns on the two risky assets. Imagine that each asset returns either θ= 1 or θ = 5 and that τ= 2. You should be able to construct an example from this. The second example is even easier. What happens if θ1and θ2 are perfectly positively correlated and θ2 always exceeds θ1?)
2. Prove that if we have two risky assets with independent return distributions, all the results obtained in the text for the case of one risky asset extend.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.