Question

A pension fund manager is considering three mutual funds. The first is a stock fund, the...

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?

Homework Answers

Answer #1

Calculate the standard deviation as follows:

Therefore, the standard deviation is 19.94%.

Formulas:

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