You have decided to invest in three mutual funds: one in equities, one in long corporate and government bonds, and a money market fund invested in T-bills yielding 5%. Your estimate of the relevant parameters for the equities and bond funds are as follows:   Expected Return Standard Deviation Equities .15 .30 Bonds .06 .09   The correlation between the fund returns is 0.12. Without the money market fund, what would be the weights of a portfolio on the best feasible CAL, composed of the equities and bond funds which would be expected to return 10%, and what would be its standard deviation?

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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INV 1 6d

You have decided to invest in three mutual funds: one in equities, one in long corporate and government bonds, and a money market fund invested in T-bills yielding 5%. Your estimate of the relevant parameters for the equities and bond funds are as follows:

 

Expected Return

Standard Deviation

Equities

.15

.30

Bonds

.06

.09

 

The correlation between the fund returns is 0.12.

  1. Without the money market fund, what would be the weights of a portfolio on the best feasible CAL, composed of the equities and bond funds which would be expected to return 10%, and what would be its standard deviation?
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