Topic: Capital Allocation 3) You manage a risky portfolio with the expected return of 11% and standard deviation of 16%. The risk free rate (T-Bill rate) is 5%. The borrowing, LIBOR, rate is 7%. Suppose the expected return on S&P500 is 12%, and standard deviation is 20%. a) Assume that there is a risk averse investor who cannot borrow. Is he/she going to invest with your fund or would prefer to buy ETF which replicates S&P500? Why? b) If the investor can borrow now and intend to do so, which portfolio she would prefer: your fund or S&P500? Why? c) You achieve a greater degree of diversification and the standard deviation of your fund is now 15%, and you still maintain the same expected return. For this effort, you start charging a management fee of 1%. Would your answer to (b) change? How? Topic: Capital Allocation 3) You manage a risky portfolio with the expected return of 11% and standard deviation of 16%. The risk free rate (T-Bill rate) is 5%. The borrowing, LIBOR, rate is 7%. Suppose the expected return on S&P500 is 12%, and standard deviation is 20%. a) Assume that there is a risk averse investor who cannot borrow. Is he/she going to invest with your fund or would prefer to buy ETF which replicates S&P500? Why? b) If the investor can borrow now and intend to do so, which portfolio she would prefer: your fund or S&P500? Why? c) You achieve a greater degree of diversification and the standard deviation of your fund is now 15%, and you still maintain the same expected return. For this effort, you start charging a management fee of 1%. Would your answer to (b) change? How