A pension fund manager is considering three mutual funds. The first is a stock f

Question

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 4.7%. The probability distributions of the risky funds are: Expected Return Standard Deviation Stock fund (S) 17 % 37 % Bond fund (B) 8 % 31 % The correlation between the fund returns is .1065. Suppose now that your portfolio must yield an expected return of 15% and be efficient, that is, on the best feasible CAL. a. What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-1. What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.) (Stocks and Bonds)

Explanation / Answer

a) What is the expected return of the MVP? b) What is the reward-to-variability ratio of the best feasible CAL? The reward-to-variability ratio of the best feasible CAL is the slope of the CAL that connects ORP and the risk-free security. As in question 2 above, the weight on Fund A in the ORP should satisfy the following condition: = 0 E(rP)

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