(1) Find out the minimum-variance portfolio, its expected return and standard deviation. (2) Find out the optimal risky portfolio, its expected return and standard deviation. (3) What is the reward-to-volatility ratio of the best feasible CAL? (4) 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. What is the proportion invested in the T-bill fund and each of the two risky funds? (5) If you were to use only the two risky funds and still require an expected return of 15%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimal portfolio. What do you conclude?
- 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 4.8%. The probability distribution of the risky funds are:
|
|
Expected Return |
Standard Deviation |
|
Stock fund (S) |
18% |
38% |
|
Bond fund (B) |
9% |
32% |
The correlation between the fund returns is 0.13.
(1) Find out the minimum-variance portfolio, its expected return and standard deviation.
(2) Find out the optimal risky portfolio, its expected return and standard deviation.
(3) What is the reward-to-volatility ratio of the best feasible CAL?
(4) 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. What is the proportion invested in the T-bill fund and each of the two risky funds?
(5) If you were to use only the two risky funds and still require an expected return of 15%, what would be the investment proportions of your portfolio?
Compare its standard deviation to that of the optimal portfolio. What do you conclude?
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