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 rate of 8 percent. The probability distribution ofthe risky funds is as follows:

	Expected Return	Standard Deviation
Stock fund (S)	.20	.30
Bond fund (B)	.12	.15

The correlation between the fund returns is 0.10.

1. What are the investment proportions of the minimum-varianceportfolio of the two risky funds, and what is the expected valueand standard deviation of its rate of return?
2. Solve numerically for the proportions of each of the assetsand for the expected return and standard deviation of theoptimal risky portfolio.
3. What is the reward-to-variability ratio of the best feasibleCAL?
4. You require that your portfolio yield an expected return of 14percent and be efficient on the best feasible CAL.
   1. What is the standard deviation of your portfolio?
   2. What is the proportion invested in the T-bill fund and each ofthe two risky funds?
5. If you were to use only the two risky funds and will require anexpected return of 14 percent, what must be the investmentproportions of your portfolio? (Compare its standard deviation tothat of the optimized portfolio in question 4.)