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 rate of 5.5%. The probability distribution of the risky funds is as follows:    Expected return   Standard Deviation Stock fund (S) 16%    32%         Bond fund (B) 10       23         The correlation between the fund returns is 0.20. Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL.   Required: a. What is the standard deviation of your portfolio?   What is the proportion invested in the T-bill fund? What is the proportion invested in each of the two risky funds? Proportion Invested   Stocks   % Bonds     %

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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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 rate of 5.5%. The probability distribution of the risky funds is as follows:

 

 Expected return

 

Standard Deviation

Stock fund (S)

16%

   32%

 

 

 

 

Bond fund (B)

10

      23

       

The correlation between the fund returns is 0.20.

Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL.

 

Required:

a. What is the standard deviation of your portfolio?

 

  1. What is the proportion invested in the T-bill fund?
  2. What is the proportion invested in each of the two risky funds?


Proportion Invested

 

Stocks

 

%

Bonds

   

%

 

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