Mini Case In a frictional world, there are three stocks. The current price is denoted by Po, which is known. The next period price is denoted by P, which is uncertain: Stock Po E[P] Dividend A 50 51 3 B 50 53 1 50 54 0 Standard Deviation of P 1 2 3 The prices of three stocks are independent. Suppose the tax rate on dividend is 40% and the tax on realized capital gain is 20% (a) Calculate the expected return and return standard deviation of three stocks (b) Investment Company initiated two funds: (1) Fund M: the portfolio is equally weighted on three stocks. It has .1% of the asset value as the fee; (2) Fund T: the portfolio is equally weighted on stock B and C. It has 3% of the asset value as the fee. Assume that the fee is calculated using the asset value at the period 0. Calculate the expected before and after-tax return separately for Fund M and T (capital gains need to be realized). (c) Compute the return standard deviation using after-tax return. Then calculate Sharpe ratio of two funds assume the risk-free rate is 1.9%. Mini Case In a frictional world, there are three stocks. The current price is denoted by Po, which is known. The next period price is denoted by P, which is uncertain: Stock Po E[P] Dividend A 50 51 3 B 50 53 1 50 54 0 Standard Deviation of P 1 2 3 The prices of three stocks are independent. Suppose the tax rate on dividend is 40% and the tax on realized capital gain is 20% (a) Calculate the expected return and return standard deviation of three stocks (b) Investment Company initiated two funds: (1) Fund M: the portfolio is equally weighted on three stocks. It has .1% of the asset value as the fee; (2) Fund T: the portfolio is equally weighted on stock B and C. It has 3% of the asset value as the fee. Assume that the fee is calculated using the asset value at the period 0. Calculate the expected before and after-tax return separately for Fund M and T (capital gains need to be realized). (c) Compute the return standard deviation using after-tax return. Then calculate Sharpe ratio of two funds assume the risk-free rate is 1.9%