Three Mutual Funds:

Expected Return on Stock Fund (S) = 12%

Expected Return on Bond Fund (B) = 8%

Standard Deviation on Stock Fund (S) = 20%

Standard Deviation on Bond Fund (B) = 10%

Expected Return on T-Bill = 4%

Standard Deviation on T-Bill= ?

Correlation between S and B is 0.15

Formula: std2,p = (w2,1)(std2,1)+(w2,2)(std2,2)+(2w1w2)Cov(r1r2)

Cov(r1r2)= (p1,2)(std1)(std2)

To construct a minimum-variance portfolio, one needs put 16% weights on Stock, and the rest on

Bond. To construct an optimal risky portfolio, one needs put 38% weights on Stock, and the rest

on Bond.

1) How to use risky assets only to construct an efficient portfolio P with a return of 10%?

Whats portfolio Ps standard deviation?

2) How to use risky assets and the risky free T-bill to construct an efficient portfolio Y with

a return of 10%? Whats portfolio Ys standard deviation?