1. A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate fund, and the third is a (riskless) T-bill money market fund that yields a rate of 8%. The probability distributions of the risky funds have the following characteristics: Standard Deviation (%) Expected return (%) Stock fund (Rs) 20 30 Bond fund (RB) 12 15 The correlation between the fund returns is .10. (e) You require that your portfolio of all three assets yield an expected return of 14% and that it be efficient on the best feasible CAL. What is the standard deviation of your portfolio and what is the proportion invested in each of the three types of assets? (f) If you were to use only the two risky funds, and still require an expected return of 14%, what share would you invest in each? Compare the standard deviation of this portfolio to that of the optimal portfolio found in the previous part (part e). What do you conclude? (g) Solve for the optimal portfolio (of the three assets) of an investor with mean variance preferences U(R)E(R)-4 · Var (R), where R represents the portfolio return, measured in decimal points.
1. A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate fund, and the third is a (riskless) T-bill money market fund that yields a rate of 8%. The probability distributions of the risky funds have the following characteristics: Standard Deviation (%) Expected return (%) Stock fund (Rs) 20 30 Bond fund (RB) 12 15 The correlation between the fund returns is .10. (e) You require that your portfolio of all three assets yield an expected return of 14% and that it be efficient on the best feasible CAL. What is the standard deviation of your portfolio and what is the proportion invested in each of the three types of assets? (f) If you were to use only the two risky funds, and still require an expected return of 14%, what share would you invest in each? Compare the standard deviation of this portfolio to that of the optimal portfolio found in the previous part (part e). What do you conclude? (g) Solve for the optimal portfolio (of the three assets) of an investor with mean variance preferences U(R)E(R)-4 · Var (R), where R represents the portfolio return, measured in decimal points.
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 4MC
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Transcribed Image Text:1. A pension fund manager is considering three mutual funds. The first is a stock fund, the
second is a long-term government and corporate fund, and the third is a (riskless) T-bill
money market fund that yields a rate of 8%. The probability distributions of the risky
funds have the following characteristics:
Standard Deviation (%)
Expected return (%)
Stock fund (Rs) 20
30
Bond fund (RB) 12
15
The correlation between the fund returns is .10.
Transcribed Image Text:(e) You require that your portfolio of all three assets yield an expected return of 14%
and that it be efficient on the best feasible CAL. What is the standard deviation
of your portfolio and what is the proportion invested in each of the three types of
assets?
(f) If you were to use only the two risky funds, and still require an expected return of
14%, what share would you invest in each? Compare the standard deviation of this
portfolio to that of the optimal portfolio found in the previous part (part e). What
do you conclude?
(g) Solve for the optimal portfolio (of the three assets) of an investor with mean variance
preferences
U(R)E(R)-4 · Var (R),
where R represents the portfolio return, measured in decimal points.
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