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Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 22%. The T-bill rate is
Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 22%. The T-bill rate is 3%. Your client chooses to invest 60% of a portfolio in your fund and 40% in a T-bill money market fund. a. You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 12% with a standard deviation of 18%. Draw the CML and your fund's CAL on an expected return/standard deviation diagram with appropriate label. b. Your client (see previous problem) wonders whether to switch the 60% that is invested in your fund to the passive portfolio. Explain to your client the disadvantage of the switch. c. Show your client the maximum fee you could charge (as a percent of the investment in your fund deducted at the end of the year) that would still leave him at least as well off investing in your fund as in the passive one. Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 22%. The T-bill rate is 3%. Your client chooses to invest 60% of a portfolio in your fund and 40% in a T-bill money market fund. a. You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 12% with a standard deviation of 18%. Draw the CML and your fund's CAL on an expected return/standard deviation diagram with appropriate label. b. Your client (see previous problem) wonders whether to switch the 60% that is invested in your fund to the passive portfolio. Explain to your client the disadvantage of the switch. c. Show your client the maximum fee you could charge (as a percent of the investment in your fund deducted at the end of the year) that would still leave him at least as well off investing in your fund as in the passive one
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