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:

	Expected Return	Standard Deviation
Stock fund (S)	0.20	0.30
Bond fund (B)	0.12	0.15

The correlation between the fund returns is 0.10.

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):

	Forecasted Return	CAPM Beta
Fund T	9.00%	1.20
Fund U	10.00%	0.80

3.a. (6 points)If the risk-free rate (RFR) is 3.9% and the expected market risk premium (i.e., E(R_M) RFR) is 6.1%, 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?