The following information applies to the questions displayed below.] 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 16% Standard Deviation Stock fund (S) Bond fund (B) 32% 10% 23% The correlation between the fund returns is 0.20.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds?
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[The following information applies to the questions displayed below.]
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
16%
Standard Deviation
Stock fund (S)
Bond fund (B)
32%
10%
23%
The correlation between the fund returns is 0.20.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F623e2689-743b-4fcc-b895-9164ac0fd9cd%2F8cf93c2f-9534-4bd2-94e3-434c6b5ca8ed%2Fg2jiw19_processed.png&w=3840&q=75)
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