You estimate that a passive portfolio invested to mimic the S&P 500 stock index provides an expected rate of return of 13% with a standard deviation of 25%. (GLO 5-4) a. Draw the CML and vour fund's CAL on an expected return/standard deviation diagram. b. What is the slope of the CML? c. Characterize in one short paragraph the advantage of your fund over the index fund.

16. Your client (see previous problem) wonders whether to switch the 70% that is invested in your fund to the index portfolio. (L LO 5-4) a. Explain to your client the disadvantage of the switch. b. 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 client's CAL by reducing the expected return net of the fee.)