2.(1 mark) Your Aunt Catherine from St. John, New Brunswick asks you to select TWO actively managed funds from the list of four funds below to combine with her assets in an S&P 500 index fund. The risk-free rate r_f = 0.04, the expected market index return E(r_M) = 14%, and the expected market volatility _M = 0.20.

FundBetaStd. Dev.AlphaResidual Volatility (e_i)

S&P 500 Index1.000.20 0.000.00

Growth Special1.500.50 0.040.40

Balanced0.600.20 0.040.16

Value 0.900.30 0.030.24

Income 0.300.10 0.020.08

Which two active funds do you recommend to your Aunt Catherine and why?

3.(1 mark) In Question 2 above, suppose that you pick Balanced and Income as the two active funds to comprise an active subportfolio that you would combine with the S&P 500 Index fund. What would be the weights of Balanced and Income to the nearest 1/100^th of a percent (0.XXXX in decimal form) in this active subportfolio? (Hint: Remember to scale your weights to sum to 1.)

4.(1 mark) Assuming that you optimally combine the active subportfolio and the index fund discussed in Questions 2 and 3 above, what would be the Sharpe ratio to two decimal places (0.XX) for this combination fund?

only need help with question number 4