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A Pension Fund Manager is considering three mutual funds. The first is a stock fund,...

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Finance

A Pension Fund Manager is considering three mutual funds. The first is a stock fund, the second is a long-term government bond fund, and the third is a t-bill money market fund yielding 5.5%. The correlation between the fund returns is .15. The probability distribution of the risky funds are:

E( R )

STDEV

Stock Fund (S)

15%

32%

Bond fund (B)

9%

23%

First, tabulate and draw the investment opportunity set (meaning the different return and standard deviation combinations) of the 2 risky funds using proportions for the stock fund from 0% to 100% (and thus proportions of the bond fund from 100% to 0%) in increments of 20%.

A. What is the return of the minimum variance portfolio?

B. What is the standard deviation of the minimum variance portfolio?

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