You estimate that a passive portfolio invested to mimic the S&P; 500 stock index

Question

You estimate that a passive portfolio invested to mimic the S&P; 500 stock index yields an expected rate of return of 13 percentage with a standard deviation of 25 percentage Draw the CML and your fund's CAL on an expected return/standard deviation diagram. What is the slope of the CML? Characterize in one short paragraph the advantage of your fund over the passive fund. Your client (see precious problem) wonders whether to switch the 70 percentage that is invested in your fund to the passive portfolio. Explain to your client the disadvantage of the switch. 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 What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks?

Explanation / Answer

Answer

Answer No. 17

When there is increase in volatility of stock, risk related to that stock will also rise so investor would also expect higher return in line with increase in volatility of stock.

So if investors perceived an increase in the volatility of stocks, expected return on stocks would also rise.

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