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 5.5%. The probability distributions of the risky funds are:

   

   

   

What is the reward-to-volatility ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

   

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 5.5%. The probability distributions of the risky funds are:

Explanation / Answer

This ratio is aso called Trainers Ratio

Reward to Volatility Ratio = (Rp - Rf) / Beta Rf = 5.5% Stock fund Bond Fund Rp 15% 9% Standard deviation of Stock Fund 32.00% 23.00% Beta = Covariance / Standard Deviation Correlation of (A, B) = Covariance (A,B) / (Standard Deviation of A)*(Standard Deviation of B) Correlation of (A, B) 0.15 Therefore: .15 = Covariance of A,B / (.32*.23) Covariance = 0.011 Stock fund Bond Fund Beta = 0.0345 0.048 Reward to Volatility Ratio 2.75 0.73

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