You are a portfolio manager of a risky portfolio with an expected rate of return of 14% and a standard deviation of 28%. The T-bill rate is 4%. Suppose your client decides to invest in your risky portfolio a proportion (y) of his total investment budget so that his overall portfolio will have an expected return of 10%.

a. What is the proportion y ?

b. What will be the standard deviation of your clients portfolio ?

c. What is the Sharpe ratio ?

d. Suppose your client is wondering if he should switch his money in your fund to a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 9% with a standard deviation of 25%. 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. (Hint: The fee will lower the slope of your clients CAL by reducing the expected return net of the fee.)