A pension fund manager is considering three mutual funds.

QUESTION 10 A pension fund manager is considering three mutual funds. The rst is a stock fund, the second is a long-term government and corporate bond fund, and the third is a Tbill money market fund that yields a rate of %8. The correlation between the stock and bond funds is 0.10. The probabil- ity distributions of the risky funds is as follows: Table 1: Question 10 Expected Return Standard Deviation Stock Fund (S) 20% 30% Bond Fund (B) 12% 15% (A) What are the investment proportions in the minimumvariance portfolio, and what is it's standard deviation and expected rate of return? (B) Draw the investment opportunity set of the two risky funds. Use invest ment proportions for the stock fund from 0 to 100% in increments of 5%. (C) What is the expected return and standard deviation of the optimal risky 4 portfolio? (D) What is the Sharpe ratio of the best feasible CAL? (E) You require that your portfolio yield an expected return of 14%. What is the standard deviation of y0ur portfolio? What are the preportions invested in thc T-bill, stock, and bond funds? (F) If you were to use only the two risky funds, and still require an expected return of 14%, what would the investment proportions in your portfolio be? Compare this standard deviation to what you found in part (E)