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 rate of 5.2%. The probability distribution of the risky funds is as follows:

Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (Do not round intermediate calculations and round your final answers to 2 decimal places. Omit the "%" sign in your response.)

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 rate of 5.2%. The probability distribution of the risky funds is as follows:

Explanation / Answer

The required rate of return in not given. Hence we cannot calulate the proportion in the two funds and we assume equal proportion

A- 50% and B 50%

Now the expected return will br 0.5*13 + 0.5* 6= 9.5%

The std dev of the portfolio is given by the formula

sqrt(w1^2*sd1^2 + w2^2*sd2^2 + 2*sd1*sd2*corr*w1*w2)

where w1 is the weight of A = 0.5

w2= weight of B=0.5

sd1 = std.dev of A =42% =0.42

sd2=std. dev. of B =36% = 0.36

corr =0.19

portfolio sd = sqrt (0.5^2*0.42^2+0.5^2*0.36^2+2*05*0.5*0.19*0.42*0.36) = 0.3014 = 30.14%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.