Question

Suppose that the borrowing rate that your client faces is 9%. Assume that the S&P 500 index has an expected return of 16% and standard deviation of 24%. Also assume that the risk-free rate is r_f = 3%. Your fund manages a risky portfolio, with the following details: E(r_p) = 14%, σ_p = 15%.

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.)

Answer 1

Solutions for the investor is a leader, y must be less than 1, Risk aversion must be large enough that, y = 1 €19p) - Mp)/(01X5.92) 21. As given, timp) = 149%, S.Dlop) = 15% , 914 = 3%. A> (149-3)/(-01X 15%) <l. A> W/.01x225 100 AT 1/2.25 A > 4,888 A> 4.89 for the investor å borrowed, y must be greater than I, risk a version must be small enough that, yoceram) – 9f)/<.01X3.03) XI. As given, Ecom) = 16%, 94-9%, 5.0 = 24%, AG (16-9)/.01x242) Aa 77014576 A <7/576 A<1.215 AL 1.22

for the values of risk a version with in this range, the lovestors Deither borrows nor lends, but instead holde a complete portfollio comprised only of the optimal rieby portfollio. y=1 for 1.22€ A 2 4.89.