Bert Smith, CFA, recommends three equity funds for his new client Walter Clay. Smith uses meanvariance analysis and optimization to derive allocation decisions. Clay admittedly knows little about investing beyond some knowledge of the benefits of diversification. Smith gathers data on the following three funds, along with his recommended allocation:

FundExpected ReturnStandard DeviationAllocationBlue Sky8%18%60%Green Earth12%25%30%Red Space14%31%10%

The correlation matrix:

FundBlue SkyGreen EarthRed SpaceBlue Sky1.00Green Earth0.631.00Red Space0.390.411.00

Clay asks for a detailed explanation from Smith on efficiency and correlation as well as the possibility of adding a riskfree security to the suggested portfolio. Smith responds with two observations:

• Observation 1:We could add a riskfree government bond fund and this would provide more efficient allocation choices.
• Observation 2:Adding a riskfree government bond fund will have significant diversification benefits because the correlation between the government bond fund and the suggested portfolio is likely to be negative.

Finally, Smith informs Clay that another fund, Core Fund, might be a good addition to his portfolio because it has an expected return of 15% and a standard deviation of 28%.

The expected return and standard deviation of the threefund portfolio isclosest to:

Expected Return Standard Deviation

A.0.098 0.033

B.0.098 0.182

C.0.113 0.182

Group of answer choices

Row B

Row C

Row A

Please explain your answer