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, and the third is a T-bill money market fund that yields a rate of 8%. The mean and the standard deviation of the risky funds is as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12% 15% The correlation between the fund returns is 0.10. Your client’s degree of risk aversion is A = 3.5. Given the utility function: U = E(r) - 1/2 A Sigma^2
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, and the third is a T-bill
|
|
Expected Return |
Standard Deviation |
|
Stock fund (S) |
20% |
30% |
|
Bond fund (B) |
12% |
15% |
The correlation between the fund returns is 0.10.
Your client’s degree of risk aversion is A = 3.5. Given the utility function: U = E(r) - 1/2 A Sigma^2
What proportion, y, of the total investment should be invested in the tangency portfolio so that your client can maximize his/her expected utility?
What is the expected value and standard deviation of the
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