A pension fund manager is considering three mutual funds. The first is a stock fund, the...

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Finance

A pension fund manager is considering three mutual funds. Thefirst is a stock fund, the second is a long-term government andcorporate bond fund, and the third is a T-bill money market fundthat yields a sure rate of 3.0%. The probability distributions ofthe risky funds are:
Expected Return Standard Deviation
Stock fund (S) 12 % 41 %
Bond fund (B) 5 % 30 %
The correlation between the fund returns is .0667.

Suppose now that your portfolio must yield an expected return of 9%and be efficient, that is, on the best feasible CAL.

a. What is the standard deviation of yourportfolio? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)

Standard deviation            %
b-1. What is the proportion invested in theT-bill fund? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)

Proportion invested in the T-bill fund            %

b-2. What is the proportion invested in each ofthe two risky funds? (Do not round intermediatecalculations. Round your answers to 2 decimal places.)
Proportion Invested
Stocks %
Bonds %

Answer & Explanation Solved by verified expert

4.2 Ratings (886 Votes)

To find the fraction of wealth to invest in Stock Fund that willresult in the risky portfolio with maximum Sharpe ratio thefollowing formula to determine the weight of Stock Fund in riskyportfolio should be usedWhereStock FundERd1200Bond fundERe500Stock FundStdevRd4100Bond See Answer

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A pension fund manager is considering three mutual funds. Thefirst is a stock fund, the second is a long-term government andcorporate bond fund, and the third is a T-bill money market fundthat yields a sure rate of 3.0%. The probability distributions ofthe risky funds are: Expected ReturnStandard DeviationStock fund (S)12%41%Bond fund (B)5%30%The correlation between the fund returns is .0667.Suppose now that your portfolio must yield an expected return of 9%and be efficient, that is, on the best feasible CAL.a. What is the standard deviation of yourportfolio? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)Standard deviation %b-1. What is the proportion invested in theT-bill fund? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)Proportion invested in the T-bill fund %b-2. What is the proportion invested in each ofthe two risky funds? (Do not round intermediatecalculations. Round your answers to 2 decimal places.)Proportion InvestedStocks%Bonds%

	Expected Return		Standard Deviation
Stock fund (S)	12	%	41	%
Bond fund (B)	5	%	30	%