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Equity markets 17 - Chapter 7 Capital Allocation Between...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset This allows the students to explore the nature of the equation that was derived by maximizing the investor's expected utility. The student can illustrate an understanding of the variables that supercedes the application of the equation in calculating the optimal proportion in P. Difficulty: Difficult 43. You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%. The other is a fund that is actively managed by your broker. This fund has an expected return of 15% and a standard deviation of 20%. The risk-free rate is currently 7%. Answer the questions below based on this information. a.What is the slope of the Capital Market Line? b.What is the slope of the Capital Allocation Line offered by your broker's fund? c.Draw the CML and the CAL on one graph. d.What is the maximum fee your broker could charge and still leave you as well off as if you
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