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 5.6%. The probability distributions of the risky funds are: The correlation between the fund returns is.0600. 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? b-1. What is the proportion invested in the T-bill fund? b-2. What is the proportion invested in each of the two risky funds?

Explanation / Answer

E(rc) rf 5.60% Sigma s 46.00 Er(S) 17 Sigma b 40.00 Er(B) 8 Corre. Coeff 0.06 Bonds Stock Bonds 1600.00 110.4 Stock 110.4 2116.00 Numerator 1489.6 Denominator 3495.2 Wmin (S) 0.426184 Wmin(B) 0.573816 Ws rf 5.60 Sigma s 46.00 Er(S) 17 Sigma b 40.00 Er(B) 8 Corre. Coeff 0.06 (Er(S)-rf)*sigmaB^2 18240 (Er(B)-rf)*Cov(r,s) 264.96 Ws Numerator 17975.04 18240 5078.4 1523.52 Denominator 21794.88 Ws 0.824737 Wb 0.175263 Er(p) 44.94842 % Std deviation 38.99163 % rf 5.60 Er(P)-rf 39.35 Er©-rf 9.40 Sigma C 9.314765

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