b. Show your client the maximum fee you could charge (as a percent of the investment in your fund deducted at the end of the year) that would still leave him at least as well off investing in your fund as in the passive one. (Hint: The fee will lower the slope of your client's CAL by reducing the expected return net of the fee.)
24. What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks?
25. The change from a straight to a kinked capital allocation line is a result of the:
a. Reward-to-variability ratio increasing.
b. Borrowing rate exceeding the lending rate.
c. Investor's risk tolerance decreasing.
d. Increase in the portfolio proportion of the risk-free asset.
26. You manage an equity fund with an expected risk premium of 10% and an expected standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client's portfolio?
Expected Return Standard Deviation of Return a. 8.4% 8.4%
27. What is the reward-to-variability ratio for the equity fund in problem 26?
For problems 28-30, download Table 5.3: Rates of return, 1926-2001, from www.mhhe.com/ blkm.
28. Calculate the same subperiod means and standard deviations for small stocks as Table 5.5 of the text provides for large stocks.
a. Do small stocks provide better reward-to-variability ratios than large stocks?
b. Do small stocks show a similar declining trend in standard deviation as Table 5.5 documents for large stocks?
29. Convert the nominal returns on both large and small stocks to real rates. Reproduce Table 5.5 using real rates instead of excess returns. Compare the results to those of Table 5.5.
30. Repeat problem 29 for small stocks and compare with the results for nominal rates.
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