A pension fund manager is considering three mutual funds. The first is a stock fund, the second
Question:
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 5.5%. The probability distributions of the risky funds are:
Expected Return, Standard Deviation
Stock fund (S) 17%, 40%
Bond fund (B) 11%, 31%
The correlation between the fund returns is 0.10.
What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
1.)
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2.) What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.)
3.) What would be the investment proportions of your portfolio if you were limited to only the stock and bond funds and the portfolio has to yield an expected return of 12%?
4.) Calculate the standard deviation of the portfolio which yields an expected return of 12%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Suppose now that your portfolio must yield an expected return of 14% and be efficient, that is, on the best feasible CAL.
5.) What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
6.) What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
7.) What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Expert Answer:
ANSWER 1 The proportion of stocks in the optimal risky portfolio is given by Weight of Stock Return on ... View the full answer
