Problem $2(20$ points$).$ A pension fund manager is considering two mutual funds. The first is a

stock fund, the second is a long$-$term government and corporate bond fund. The probability

distribution of the risky funds is as follows:

The correlation between the fund returns is $0\mathrm{.}10.$

Please keep $4$ numbers after the decimal point in your answers.

$2.$a$.(2$ points$)$ What is the covariance between the two funds' returns?

$2.$b$.(6$ points$)$ What are the weights of the two risky funds in the minimum$-$variance portfolio.

$2.$c $(4$ points$)$ What is the expected return of the minimum variance portfolio?

$2.$d$,(8$ points$)$ What is the standard deviation of the minimum variance portfolio?

Problem $3(10$ points$)$ As an equity analyst, you have developed the following return forecasts

and risk estimates for two different stock mutual funds $($Fund T and Fund U$)$:

$3.$a$.(6$ points$)$ If the risk$-$free rate $($RFR$)$ is $3\mathrm{.}9\%$ and the expected market risk premium $($i$.$e$.,$

$E(R_M)-RFR)$ is $6\mathrm{.}1\%,$ calculate the expected return for each mutual fund according to the

CAPM

$3.$b$.(4$ points$)$ Decide which fund is overvalued, undervalued or properly valued and explain

why?