Part 1 (Excel):
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 your
comments. If you want, you can help yourself with graphs to clarify your answers.
Part 2 (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 2 of the excel 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?
