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 5.5%. The probability distributions ofthe risky funds are:
Expected Return Standard Deviation
Stock fund (S) 15 % 32 %
Bond fund (B) 9 % 23 %

The correlation between the fund returns is 0.15.

Suppose now that your portfolio must yield an expected return of12% 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.)

b-1. What is the proportion invested in the T-billfund? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)

b-2. What is the proportion invested in each ofthe two risky funds? (Do not round intermediatecalculations. Round your answers to 2 decimalplaces.)
NUMBERS CANNOT BE ROUNDED UNTIL FINAL ANSWER OR ELSE IT WILL BEINCORRECT.

Answer & Explanation Solved by verified expert

3.8 Ratings (688 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 fundERd1500Bond fundERe900Stock fundStdevRd3200Bond 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 5.5%. The probability distributions ofthe risky funds are:Expected ReturnStandard DeviationStock fund (S)15%32%Bond fund (B)9%23%The correlation between the fund returns is 0.15.Suppose now that your portfolio must yield an expected return of12% 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.)b-1. What is the proportion invested in the T-billfund? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)b-2. What is the proportion invested in each ofthe two risky funds? (Do not round intermediatecalculations. Round your answers to 2 decimalplaces.)NUMBERS CANNOT BE ROUNDED UNTIL FINAL ANSWER OR ELSE IT WILL BEINCORRECT.

	Expected Return		Standard Deviation
Stock fund (S)	15	%	32	%
Bond fund (B)	9	%	23	%