Question: Suppose your expectations regarding the two equity and bond fund returns are as follows: State of the Market Probability Bond fund return Equity fund return

Suppose your expectations regarding the two equity and bond fund returns are as follows:

State of the Market	Probability	Bond fund return	Equity fund return
Boom	0.35	5%	25%
Normal growth	0.30	6%	15%
Recession	0.35	-5%	−15%

Compute the mean and standard deviation of each fund.

The correlation coefficient between the two funds is 0.95.

If you build a portfolio with 50% in the bond fund and 50% in the equity fund, What will be the expected return and standard deviation on that portfolio?

Tbill return is 1%. Your risk aversion is 3. Lets assume you as an investor have the typical utility function. What percent of your wealth should you invest in the risk-free Tbill and what percent in the risky portfolio which is a combination of half equity fund and half bond fund?

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