Question

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)	20%	35%
Bond Fund (B)	11%	15%

The correlation between the fund returns is 0.09.

You require that your portfolio yield an expected return of 12%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Round your answer to 2 decimal places.)

b. What is the proportion invested in the T-bill fund and each of the two risky funds (stocks, bonds, t-bills)? (Round your answers to 2 decimal places.)

Answer 1