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 8 percent. The probability distribution of the risky funds is as follows:

	Expected Return	Standard Deviation
Stock fund (S)	.20	.30
Bond fund (B)	.12	.15

The correlation between the fund returns is 0.10.

1. What is the reward-to-variability ratio of the best feasible CAL?
2. You require that your portfolio yield an expected return of 14 percent and be efficient on the best feasible CAL.
   1. What is the standard deviation of your portfolio?
   2. What is the proportion invested in the T-bill fund and each of the two risky funds?

Answer 1