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<6> You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields...

<6> You estimate that a passive portfolio invested to mimic the S&P 500 stock index yields an expected rate of return of 13% with a standard deviation of 25%. Draw the CML (capital market line) and your fund’s CAL on an expected return/standard-deviation diagram.

  1. What is the slope of the CML?
  2. Please characterize in one short paragraph the advantage of your fund over the passive portfolio investing in S&P 500 index.

[NOTE: CML (capital market line) is a special case of the CAL; specifically, the risky portfolio in the CML line is a market portfolio.  (In practice, we often use S&P 500 index as a proxy for the market portfolio.) ]

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jeff jeffy answered 3 weeks ago
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