2 0.1589 Expected return Standard deviation 0.1845 10/10 points awarded Scored Explanation The proportion of the optimal risky portfolio invested in the stock fund is given by: eBook Ws [E(rs) - rf] og2 - [E(rB) - rf] * Covirs, rb) og? + [E(rs) - rf] x os2 - [E(rs) - rf + ElrB) - rf] * Covrs, ro) [E(rs) - rfl x Print References = [(0.18 - 0.07) 400] - [(0.15 - 0.07) x 84.00] [(0.18 - 0.07) x 400] + [(0.15 - 0.07) x 1,225] - [(0.18 - 0.07+ 0.15 - 0.07) x 84.00] = 0.2958 WB = 1 - 0.2958 = 0.7042 The mean and standard deviation of the optimal risky portfolio are: E(rp) = (0.2958 x 0.18) + (0.7042 x 0.15) = 0.1589 op = [(0.29582 x 1,225) + (0.70422 x 400) + (2 x 0.2958 x 0.7042 84.00)]1/2 = 0.1845 2 A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 7%. The characteristics of the risky funds are as follows: 10 points Stock fund (S) Bond fund (B) Expected Return 18% 15 Standard Deviation 35% 20 The correlation between the fund returns is 0.12. eBook Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.) Print 0.2958 References Portfolio invested in the stock Portfolio invested in the bond Expected return 0.7042 0.1589 Standard deviation 0.1845