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 rate of 5.7%. The probability distribution of therisky funds is as follows:
ExpectedReturn StandardDeviation
Stock fund (S) 18% 47%
Bond fund (B) 7 41
The correlation between the fund returns is 0.17.
Solve numerically for the proportions of each asset and for theexpected return and standard deviation of the optimal riskyportfolio. (Do not round intermediate calculations andround your final answers to 2 decimal places. Omit the "%" sign inyour response.)
Portfolio investedin the stock %
Portfolio invested in thebond %
Expected return %
Standard deviation %

Answer & Explanation Solved by verified expert

3.7 Ratings (466 Votes)

We need to calculate the weights for the stocks and the bonds so the formula for the weights calculation would be Expected Return of the stock Risk free rate Variance of bond Expected Return of the bond Risk Free rate Covariance of the stock bond Expected Return of the stock Risk free rate 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 rate of 5.7%. The probability distribution of therisky funds is as follows:ExpectedReturnStandardDeviationStock fund (S)18%47%Bond fund (B)741The correlation between the fund returns is 0.17.Solve numerically for the proportions of each asset and for theexpected return and standard deviation of the optimal riskyportfolio. (Do not round intermediate calculations andround your final answers to 2 decimal places. Omit the "%" sign inyour response.)Portfolio investedin the stock%Portfolio invested in thebond%Expected return%Standard deviation%

	ExpectedReturn	StandardDeviation
Stock fund (S)	18%	47%
Bond fund (B)	7	41


Portfolio investedin the stock	%
Portfolio invested in thebond	%
Expected return	%
Standard deviation	%