Chapter 5, Problem 15PS

For Problems 12-16, assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%.
15. You estimate that a passive portfolio invested to mimic the S&P 500 stock index provides an expected rate of return of 13% with a standard deviation 25%. Draw the CML and your fund’s CAL on an expected return/standard deviation diagram. (LO 5-4)
a. What the sloped the CML?
b. Characterize in one short paragraph the advantage of your fund over the index fund.