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%. The probability distribution of the risky funds is as follows:
Expected Return | Standard Deviation | |||||
Stock fund (S) | 17% | 30% | ||||
Bond fund (B) | 11% | 22% |
The correlation coefficient between the fund returns is 0.10.
You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL.
What is the standard deviation of your portfolio?
Calculate the standard deviation as follows:
Therefore, the standard deviation is 19.94%.
Formulas:
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