Reference no: EM13871197

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 r and still be demanded and that an asset could have an expected return greater than r 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 {J = 1 or {J = 5 and that r == 2. You should be able to construct an example from this. The second example is even easier. What happens if B1 and B2 are perfectly positively correlated and B2 always exceeds B1?