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Indifferent between investing in your fund and market index

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Reference no: EM133272605

Question

Suppose you are a fund manager and you estimate that a passive portfolio (replicating the S&P500 index) has an expected rate of return of 13% and standard deviation of 25%. You are actively managing your portfolio and based on current data its expected return is 18% and standard deviation of 28%. The risk free rate is 8%. You are preparing for a meeting with a potential client who is an EMH (Efficient Market Hypothesis) proponent and has a degree of risk aversion A = 2.5.

What proportion of her own wealth would you recommend that the potential client invest in your fund? What is the highest fee you could charge that makes her indifferent between investing in your fund and the market index.

Reference no: EM133272605

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