You are presented with the following information regarding two mutual funds in which you are considering investing:

The risk-free rate, r_f, is 3%.

 

a) (5 points) What is Sharpe Ratio of the Global Access Fund

 

b) (5 points) What is the Sharpe Ratio of the Local Opportunity Fund

 

c) (5 points) You would like to form a portfolio that has a volatility of 10% by investing in or borrowing at the risk-free rate and investing in only one of the two mutual funds.  Which mutual fund would you choose? What is the percentage of your portfolio allocated to the risk-free rate and the percentage of your portfolio allocated to the mutual fund you choose?

 

d) (5 points) Suppose everyone follows the same analysis as you and hence wants to invest in the same fund. Because of this, the managers of this fund begin charging a fee, F%, so that the after-fee return that investors get is the return of the mutual fund minus F. What is the maximum fee that they can charge before people switch funds?

Fund Global Access Fund Local Opportunity Fund Expected Return 12% 9% Volatility of Return 25% 18%