Hi, can you solve this past year question for me? (Total:17.5 marks)

Assume that you are a fund manager who manages a risky portfolio with an expected rate of return of 15% and a standard deviation of 25% with risk-free rate of 3.5%. Suppose your client has decided to invest a proportion (y) of his total investment budget into your fund and the rest into risk-free assets, giving an overall portfolio return of 10%. Meantime, you estimate a passive portfolio mimics the S&P 500 stock index yields an expected return of 10% with a standard deviation of 16%.

Required:

(a)Considering your client's degree of risk aversion is A = 2.5, what proportion

(y) out of the total investment should you suggest that he invest in your fund? Explain the role of an investor's risk aversion in the choice of the optimal risky portfolio and the optimal complete portfolio.

(9.5 marks)

(b)Discuss the difference between active-managed fund and passive-managed fund in terms of each fund's investment styles and their respective advantages and disadvantages.

(8 marks)