A pension fund manager is considering three mutual funds: a stock fund, a long-term bond fund and a money market fund that provides a risk-free return of 8%. Correlation coefficient between the fund returns is 0.15. The first two moments of the risky funds are as follows:

	Expected return	Standard deviation
Stock fund (S)	20%	30%
Bond fund (B)	12%	15%

(a) Mr Richard wants to invest $10,000 in the optimal risky portfolio consisting of stock fund and bond. How much fund should he invest in stock fund? In bond fund?

(b) Compute the expected return of the optimal risky portfolio.

Answer rating: 100% (QA)

To find the optimal investment in the stock fund and bond fund we can use the principles of portfolio theory specifically the concept of the efficient ... View the full answer