Question

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Suppose that the borrowing rate that your client faces is 10%. Assume that the S&P 500 index has an expected return of 16% and standard deviation of 22%. Also assume that the risk-free rate is re = 3%. Your fund manages a risky portfolio, with the following details: Elrp) = 12%, Op = 18%. What is the largest percentage fee that a client who currently is lending (y< 1) will be willing to pay to invest in your fund? What about a client who is borrowing (y> 1)? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) y< 1 y > 1

Answer 1

Pg No - 0 Solution in The maximum fee depends on the Reward to variability ratio also known as Sharpe Ratio. it is used to: well an investment uses Risk to get → Now determine how . Return Sharpe Ratio - Effective Reture Standard deviation () is where Effective Return = ( Expected portfolio xtur(ECM) – - Risk free rate (R4) - Lending Fee) Step - for Lenders: k1, Bisk Free Return = 6% and we will - find fee as follows. 15-3 = 12-3-fee 22 - → 0560 *1879-fee i 3"-180%= Fee. :

Pg No- for borrowed yol, the borrowing rate te., 10 is the risk free return, we will notice that Even without a fee the fund is inferior to thor passive fund since 12-10 - 0912. 18 and 0.12 < 16-10 22 in 0:12 20:28 Conclusion in more risk tolerant investors ise, the ones who are incliened to borrow will not be clients of the fund even without a Fee. However for landers they can charge a fee of – 4:30".