Exercise 3. There exists only two risky assets with returns $r_1$ and $r_2$ and a risk free rate $r_f$. You are splitting your wealth only between the two risky assets. Compute the portfolio with the highest Sharpe ratio. (Hint: The algebra is easier if you do this problem in terms of expected excess returns instead of in terms of expected returns). Show your work.
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Let's call the excess returns of asset 1 and asset 2 as e1 and e2, respectively. e1 = r1 - r e2 = r2 - r Show moreā¦
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