A.Use the following information to answer the questions below:

SecurityReturn(S1)Return(S2)

A16%20%

B12%25%

Risk-free asset return = 4%;

S1 is State-1 and S2 is State-2;

Prob(S1) = 0.6; Prob(S2) = 0.4

i).What is the expected return on Security A and the expected return on Security B?

ii).What is the standard deviation of returns of an equally weighted portfolio made up of Security A and Security B?

(continued)

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5%. The probability distributions of the risky funds are:

Expected Return Standard Deviation

Stock fund (S) 15% 32%

Bond fund (B) 9 23

The correlation between the fund returns is 0.10.

What is the Sharpe ratio for the minimum variance portfolio (MVP)?

[Hint: The minimum-variance CAL is the line joining the risk-free asset to the minimum-variance portfolio (MVP). Now calculate slope of line after characterizing the minimum-variance portfolio.]