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 5.40%. The probability distributions of the risky funds are:

                 Expected Return: Standard Deviation:

Stock fund (S)                                      15%                             44%

Bond fund (B)                                      8%                               38%

The correlation between the fund returns is 0.0684.

What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds?

	A.	Expected return: 10.95% Standard deviation: 31.40%
	B.	Expected return: 10.95% Standard deviation: 29.72%
	C.	Expected return: 14.10% Standard deviation: 29.72%
	D.	Expected return: 14.10% Standard deviation: 31.40%

Answer 1

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Answer:

Option B