Assume that you have a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-Bill rate is 7%.

Your client chose to invest 70% of a portfolio in your fund and 30% in a T-Bill money market fund.

a) What are the expected return and standard deviation of your client’s portfolio?

b) Suppose your risky portfolio includes the following investments in the given proportions:

Caterpillar, Inc: 27%

John Deere: 33%

Portola Pharmaceuticals: 40%

c) What is the Sharpe ratio (S) of your risky portfolio and your client’s overall portfolio?

d) Draw the CAL of your portfolio on an expected return/standard deviation diagram. What is the slope of the CAL? Show the position of your client on your fund’s CAL?

3. Refer to the situation in problem two You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields an expected return of 13% with a standard deviation of 25%. Draw the CML and your fund’s CAL on an expected return/standard deviation diagram.

a) What is the slope of the CML?

b) Characterize in a paragraph the advantage of your fund over the passive fund.