We have 2 risky and 1 risk-free asset.
E1 = 4%, STD1=10%
E2 = 5.5%, STD2 = 20%
rf=1.5%
The covariance matrix and it's inverse are given:
|0.01 0.006|
|0.006 0.04|
inverse:
|109.9 -16.5|
|-16.5 27.5|
ue (vector of excess returns)
(2.5 4)
Now the formula for the weights of the tangency portfolio should be:
$\frac{\Sigma^{-1} U_e}{1^T \Sigma^{-1} U_e}$
But using this formula I don't get the solution for the weights which should be (0.752,0.248)
Also what does $1^T$ or $1'$ even do? It's just the transposed vector of 1s. I looked at 500 books, videos, notes but none of them had this clearly explained so hopefully someone here could help.