You have a large sum of money that you wish to invest in a mutual fund.

Your friend recommends the fund "Best Ever". However, you heard in class that investing in the fund could be suboptimal

relative to investing on the CML. You therefore wish to examine whether the fund beats a passive investment on the CML.

The sheet "Question 3 - Data" has historical returns of the "Best Ever" fund as well as that of the SP 500. You can assume that for the period concerned,

the risk free rate is APR=0.5%, compounded monthly.

a.Calculate the monthly standard deviation of the fund and of the SP 500.

b.Find the CML portfolio that you wish to use as a benchmark for the fund (calculate the weights)

c.Calculate the historical returns of the benchmark portfolio that you calculated in (b). (Use the sheet "Question 3 - Data" column E).

d.Suppose that you had $10,000, invested on January 1st 2016.Calculate the total amount you would have as of November 2017 if you decided

(i) to invest in "Best Ever" and (ii) if you decided to invest on the CML. Which portfolio is better?

e.(This part is independent from the previous parts). You wish to achieve an expected return of 0.75% (monthly) but want to minimize your risk.

Here are two alternative strategies: (a) invest on the CML, (i.e., SP500 and risk free) and (b) Allocate your money between"Ashok" fund andthe SP500.

The (monthly) expected return on the SP500 is 1%, the (monthly) standard deviation of the S&P500 is 5%. The (monthly) rate on treasuries is 0.05%.

The (monthly) expected return on "Ashok" is 0.5% and the standard deviation of "Ashok" is 3% (monthly).The correlation between the return of "Ashok" and the SP 500 is 0.9.

Which investment strategy is better? Explain.