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2. You are a fund manager and asked to manage a risky portfolio with an expected return of 16% and standard deviation of 22%. The risk-free rate is 4%. (a) Your client invests 65% of their portfolio in your fund and 35% in the risk-free asset. What is the expected return and standard deviation of their portfolio? [10 marks) (b) Your risky portfolio comprises of four stocks with the following proportions: Stock A B D Proportion 20% 15% 55% 10% What are the investment proportions of your clients overall portfolio, including position in the risk-free asset? [10 marks) (c) Draw the CAL of your portfolio. What is the slope and what does it represent? Show the position of your client on your fund's CAL. [20 marks) (d) Your client wants to invest a proportion (y) of their wealth in your portfolio to maximum y, subject to the constraint that the complete portfolio's risk does not exceed 19%. What is the value of y? [10 marks] (e) Your clients risk aversion is 4.2. What proportion of the total investment should be in your fund and what is the expected return and standard deviation on your clients' portfolio? [10 marks] (f) Suppose your risky portfolio has a beta of 0.6. Another fund manager, Pete, has a risky portfolio on offer which has an expected return of 22%, standard deviation of 25% and beta of 1.1. Which risky portfolio is superior according to the Sharpe ratio and Treynor measure? Why can they give conflicting results? [20 marks) (9) What are ETFs? Why have they become so popular? [20 marks)

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