2. You manage an index fund that is an exact replica of the market index. The market expected annual rate of return is 16.5% with a standard deviation of 12.5%. Annual T-bill rate is 3.3%.

a. A client of yours wants you to invest 75% of his portfolio in your fund, with the rest in a Tbill money market fund. What is the expected return and standard deviation of this clients portfolio? b. What are the Sharpe ratios of your fund and clients portfolio?

c. Suppose your client prefers to invest in your fund a proportion y which maximizes the expected return on his portfolio subject to the constraint that the portfolios standard deviation will not exceed 10%.

i. What is the investment proportion, y?

ii. What is the expected rate of return on your clients portfolio?

iii. What is the degree of risk aversion (A) of this client?