Please solve the following parts by writing a Section in the report for each of them. For part 2 and part 4 you are also asked to submit the Excel file with calculations. Keep it short and help your answers with sources and references (APA style). The report should be around 5-6 pages, excluding bibliography and appendices (if needed).

Part 1: Explain the concept of asset allocation and the two-fund theorem, by describing the procedure to find the optimal capital allocation line in a market with two risky assets and the risk-free asset. Make sure you pay attention to: The steps required to build the portfolios The combination with the risk-free rate What are the possibilities of leveraging-deleveraging on the capital allocation line This is a theory question, no Excel needed. Write the answer in Section 1 of the report. If you want, you can help yourself with graphs to clarify your answers.

Part 2 (Excel): Now assume you want to invest in a market with two risky assets and the risk-free rate. The numbers are in the below table: Risky Risky Risk-free Asset 1 Asset 2 Asset ( ) 12.50% 7.50% 1.25% 25.50% 15.50% 12 0.65 It is possible to choose from eight different portfolios of risky assets, with weights: Weight Weight (Risky Asset 1) (Risky Asset 2) Portfolio 1 -20% 120% Portfolio 2 0% 100% Portfolio 3 20% 80% Portfolio 4 40% 60% Portfolio 5 60% 40% Portfolio 6 80% 20% Portfolio 7 100% 0% Portfolio 8 120% -20% Show how it is possible to select the best risky portfolio, given the information you have. Solve this part by doing the calculations on the Excel file and write the answer in Section 2 of the report, with comments. If you want, you can help yourself with graphs (Excel screenshots) to clarify your answers. For this part you also have to submit the Excel file.

Part 3: Explain how it is possible to measure the performance of a portfolio (fund) based on the features of the portfolio itself. How many tools you know for it? Answer by addressing the following points: Explain the differences between the tools Clearly indicate which tool is better to use for measuring the performance relative to the benchmark. Clearly indicate which tool is better to use for measuring the consistency of the performance. This is a theory question, no Excel needed. Write the answer in Section 3 of the report.

Part 4 (Excel): Consider now a market where three funds can be traded, and you want to understand which is the best investment for you, based on all the performance measurement tools learned in class. The numbers are: ( ) Beta Tracking Error Fund 1 10.50% 16.50% 0.10 18.00% Fund 2 16.50% 23.50% 1.10 21.00% Fund 3 35.50% 32.00% 0.50 22.50% Index 15.00% 18.50% Risk-free 1.25% Write the solution in Section 4 of the report and answer the following questions as well: Which fund(s) outperform the benchmark (index)? Which portfolio offers the highest compensation for risk? Which fund has the most consistent performance over time? For this part you also have to submit the Excel file.