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 5.7%. The probability distributions ofthe risky funds are:

Expected Return Standard Deviation
  Stock fund (S) 18 % 47 %
  Bond fund (B) 7 % 41 %

The correlation between the fund returns is .0317.
Suppose now that your portfolio must yield an expected return of16% 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

4.1 Ratings (603 Votes)

To find the fraction of wealth to invest in Stock Fund that will result in the risky portfolio with maximum Sharpe ratio the following formula to determine the weight of Stock Fund in risky portfolio should be used Where Stock Fund ERd 1800 bond fund ERe 700 Stock Fund StdevRd 4700 bond fund 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 5.7%. The probability distributions ofthe risky funds are: Expected ReturnStandard Deviation Stock fund (S)18%47% Bond fund (B)7%41% The correlation between the fund returns is .0317.Suppose now that your portfolio must yield an expected return of16% 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)	18	%	47	%
Bond fund (B)	7	%	41	%