What is the fee that you can charge

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Question - You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 15% with a standard deviation of 26%. You manage an active portfolio with expected return 19% and standard deviation 31%. The risk-free rate is 5%. Your client's degree of risk aversion is A = 2.8.

a. If he chose to invest in the passive portfolio, what proportion, y, would he select?

b. What is the fee (percentage of the investment in your fund, deducted at the end of the year) that you can charge to make the client indifferent between your fund and the passive strategy affected by his capital allocation decision (i.e., his choice of y)?

Reference no: EM132184167

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