A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 5%. The characteristics of the risky funds are as follows: Expected Stock fund (S) Bond fund (B) Return 17% Standard Deviation 38% 13 18 The correlation between the fund returns is 0.12. You require that your portfolio yield an expected return of 12%, and that it be efficient, that is, on the steepest feasible CAL. Required: a. What is the standard deviation of your portfolio? b. What is the proportion invested in the money market fund and each of the two risky funds?
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 5%. The characteristics of the risky funds are as follows: Expected Stock fund (S) Bond fund (B) Return 17% Standard Deviation 38% 13 18 The correlation between the fund returns is 0.12. You require that your portfolio yield an expected return of 12%, and that it be efficient, that is, on the steepest feasible CAL. Required: a. What is the standard deviation of your portfolio? b. What is the proportion invested in the money market fund and each of the two risky funds?
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
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Transcribed Image Text:A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third
is a money market fund that provides a safe return of 5%. The characteristics of the risky funds are as follows:
Stock fund (S)
Bond fund (B)
Expected
Return
17%
13
Standard
Deviation
38%
18
The correlation between the fund returns is 0.12.
You require that your portfolio yield an expected return of 12%, and that it be efficient, that is, on the steepest feasible CAL.
Required:
a. What is the standard deviation of your portfolio?
b. What is the proportion invested in the money market fund and each of the two risky funds?
Complete this question by entering your answers in the tabs below.
Required A Required B
What is the standard deviation of your portfolio?
Note: Round your answer to 2 decimal places.
Standard deviation
%
< Required A
Required B >
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