This data applies to the problems that follow below:

Expected Return Standard Deviation

Stock Fund S 13% 25%

Bond Fund B 6% 16%

The correlation between the fund returns is .22

T Bill money market fund yield 2.8%. The overall market return for equities is 8.6%

1. Build a covariance matrix for the stock and bond funds.

2. Calculate the proportions for the minimum variance portfolio between the stock and bonds funds.

3. Calculate the expected return and standard deviation of the optimal risky portfolio.

4. What is the Sharpe ratio of the best feasible Capital Allocation Line? What would the beta of the portfolio be for a portfolio that is 100% equity?

5. Prepare a graph of the security market line showing where a beta of 1 intersects. Graph the possible returns for the following Scenarios, using either colors or different symbols for each data point.

Scenario 1: 100% stock

Scenario 2: 80% stock / 20% bonds

Scenario 3: 60% stock / 40% bonds

Scenario 4: 40% stock / 60% bonds

Scenario 5: 80% stock / 20% bonds

Scenario 6: 100% bonds

Connect those into a Capital Allocation Line

Then add one data point for a portfolio that is 1/3 stock, 1/3 bonds and 1/3 T Bill Fund.