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) 16 % 45 %
Bond fund (B) 7 % 39 %
The correlation between the fund returns is .0385.

Suppose now that your portfolio must yield an expected return of14% 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 theT-bill fund? (Do not round intermediate calculations. Roundyour answer 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 decimal places.)

Answer & Explanation Solved by verified expert

3.8 Ratings (472 Votes)

First we will have to solve the mix for the risky optimalportfolio Let Ws be the proportion of stock fund in therisky optimal portfolio ThenNumerator 16 55 x 392 7 55 x 00385 x 39 x 45 00159Denominator 16 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)16%45%Bond fund (B)7%39%The correlation between the fund returns is .0385.Suppose now that your portfolio must yield an expected return of14% 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 theT-bill fund? (Do not round intermediate calculations. Roundyour answer 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 decimal places.)

	Expected Return		Standard Deviation
Stock fund (S)	16	%	45	%
Bond fund (B)	7	%	39	%