A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given in the following table. Fund Expected Return Standard Deviation Stock fund 10% 15% Bond fund 8% 12.5% The correlation coefficient between the stock and the bond funds is 0.20. What is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the bond fund?
A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given in the following table. Fund Expected Return Standard Deviation Stock fund 10% 15% Bond fund 8% 12.5% The correlation coefficient between the stock and the bond funds is 0.20. What is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the bond fund?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a
money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given in the following table.
|
Fund |
Expected Return |
Standard Deviation |
|
Stock fund |
10% |
15% |
|
Bond fund |
8% |
12.5% |
The correlation coefficient between the stock and the bond funds is 0.20.
- What is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the bond fund?
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