In: Finance
Answer both parts of the question.
(a) [30 marks] Discuss the Two Fund Separation Theorem. Derive the Capital Asset Pricing Model (CAPM) which determines that all equity portfolio investors must hold the same risky portfolio.
(b) [20 marks] Explain how the performance of a CAPM based portfolio, measured by cumulative returns of the portfolio, can be enhanced using using a Regime Switching approach for the stock market index.