Question

Use the following table to answer the question below.

	Expected ret.	std. dev.
S&P500	13%	25%
ABC Fund	16%	27%
T-bill	4%
Borrow	6%

What is the highest fee that a client who is currently borrowing would be willing to pay to invest in your fund instead of S&P500?

Round your answer to 4 decimal places. For example, if your answer is 3.205%, then please write down 0.0321.

Answer 1

Market price of risk for S&P500 is ^{( 0.13 - .06) / 0.25 = 0.28}

^{Market price of risk for ABC fund is (.16 - 0.06) / 0.27 = 0.37037}

^{Highest fee that a client who is currently borrowing would be willing to pay to invest in ABC fund instead of S&P500 is 0.37037 - 0.28 = 0.0904}

^{i.e. 9.04 %}