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 sure rate of 5.5%. The probability distributions of the risky funds are: Expected Return Stock fund (s) Bond fund (B) The correlation between the fund returns is 0.15. 15% 9% Standard Deviation 32% 23% uppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL. Required:

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
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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 sure rate of 5.5%. The probability
distributions of the risky funds are:
Stock fund (S)
Bond fund (8)
15%
9%
The correlation between the fund returns is 0.15.
Standard deviation
Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL.
Required:
a. What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Expected Return
%
Proportion invested in the T-bill fund
b-1. What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Stocks
Bonds
Standard
Deviation
32%
23%
Proportion Invested
b-2. What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to
2 decimal places.)
4
Transcribed Image Text: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 sure rate of 5.5%. The probability distributions of the risky funds are: Stock fund (S) Bond fund (8) 15% 9% The correlation between the fund returns is 0.15. Standard deviation Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL. Required: a. What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected Return % Proportion invested in the T-bill fund b-1. What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stocks Bonds Standard Deviation 32% 23% Proportion Invested b-2. What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 4
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