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

80.2K

Verified Solution

Question

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 5.3%. The probability distributions ofthe risky funds are:

Expected Return Standard Deviation
  Stock fund (S) 14 % 43 %
  Bond fund (B) 7 % 37 %

The correlation between the fund returns is .0459.
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 your portfolio? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)

  Standard deviation %

b-1.
What is the proportion invested in the T-bill fund? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)

  Proportion invested in the T-bill fund %

b-2.
What is the proportion invested in each of the two risky funds?(Do not round intermediate calculations. Round your answersto 2 decimal places.)
        Proportion Invested
  Stocks %
  Bonds %

Answer & Explanation Solved by verified expert

4.4 Ratings (912 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 FundERd1400bond fundERe700Stock See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

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 5.3%. The probability distributions ofthe risky funds are: Expected ReturnStandard Deviation Stock fund (S)14%43% Bond fund (B)7%37% The correlation between the fund returns is .0459.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 your portfolio? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.) Standard deviation% b-1.What is the proportion invested in the T-bill fund? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.) Proportion invested in the T-bill fund% b-2.What is the proportion invested in each of the two risky funds?(Do not round intermediate calculations. Round your answersto 2 decimal places.) Proportion Invested Stocks% Bonds%

	Expected Return		Standard Deviation
Stock fund (S)	14	%	43	%
Bond fund (B)	7	%	37	%