You Are Evaluating Two Investment Alternatives

question 43

Essay

You are evaluating two investment alternatives.One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%.The other is a fund that is actively managed by your broker.This fund has an expected return of 15% and a standard deviation of 20%.The risk-free rate is currently 7%.Answer the questions below based on this information.
a.What is the slope of the Capital Market Line?
b.What is the slope of the Capital Allocation Line offered by your broker's fund?
c.Draw the CML and the CAL on one graph.
d.What is the maximum fee you broker could charge and still leave you as well off as if you had invested in the passive market fund? (Assume that the fee would be a percentage of the investment in the broker's fund,and would be deducted at the end of the year. )
e.How would it affect the graph if the broker were to charge the full amount of the fee?

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Definitions:

Chromosomes

Structures within cells that contain DNA and gene information crucial for the development, function, and reproduction of all living organisms.

Nucleus

The membrane-bound organelle in a eukaryotic cell that contains the chromosomes and controls the cell's growth and reproduction.

Microtubules

Microtubules are cylindrical structures made of tubulin proteins, part of the cell's cytoskeleton, playing crucial roles in cell division, shape, and transport.

Cytoskeleton

A complex network of interlinking protein filaments and tubules in the cytoplasm of cells, giving them shape, coherence, and the ability to move.