A pension fund manager is considering three mutual funds. The first is a stock fund, the...
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A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate fund, and the third is a T-bill money market fund that yields a sure rate of 3%. The probability distribution of the risky funds is: Expected return Standard deviation Stock fund (S) 15% 30% Bond fund (B) 10% 20% The correlation between the fund returns is 0.1. 1. Draw the investment opportunity set for the two funds. (Without doing calculations) 2. Draw a tangent from the risk-free rate to the opportunity set. 3. The weights of the optimal risky portfolios are Ws = .5345, Wb= .4655 Suppose now that your portfolio must yield 10% and be efficient, that is, on the best feasible CAL, what is the proportion invested in the T-bill fund and each of the two risky funds? (25 points) A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate fund, and the third is a T-bill money market fund that yields a sure rate of 3%. The probability distribution of the risky funds is: Expected return Standard deviation Stock fund (S) 15% 30% Bond fund (B) 10% 20% The correlation between the fund returns is 0.1. 1. Draw the investment opportunity set for the two funds. (Without doing calculations) 2. Draw a tangent from the risk-free rate to the opportunity set. 3. The weights of the optimal risky portfolios are Ws = .5345, Wb= .4655 Suppose now that your portfolio must yield 10% and be efficient, that is, on the best feasible CAL, what is the proportion invested in the T-bill fund and each of the two risky funds? (25 points)
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