Question

Consider the following capital market: a risk-free asset yielding 2.25% per year and a mutual fund consisting of 80% stocks and 20% bonds. The expected return on stocks is 13.25% per year and the expected return on bonds is 3.95% per year. The standard deviation of stock returns is 40.00% and the standard deviation of bond returns 14.00%. The stock, bond and risk-free returns are all uncorrelated.

a. What is the expected return on the mutual fund? 11.39

b. What is the standard deviation of returns for the mutual fund? 32.12

c. Now, assume the correlation between stock and bond returns is
0.30 and the correlations between stock and risk-free returns and
between the bond and risk-free returns are 0 (by construction,
correlations with the risk-free asset are always zero).
**What is the standard deviation of returns for the mutual
fund with this new higher correlation?**

d. Using the data from c., what is the standard deviation of the minimum variance portfolio formed from this stock and bond portfolio?

e. Using the data from c. where the risk–free rate is 2.25%, what is the stock weight of the tangency portfolio formed by creating the optimal risky portfolio from this stock and bond portfolio?

f. Using the data from e., what is the Sharpe Ratio of the tangency portfolio formed by creating the optimal risky portfolio from this stock and bond portfolio? Note that the Sharpe Ratio is shown as a number rather than a percentage.

Answer #1

Consider the following capital market: a risk-free asset
yielding 2.75% per year and a mutual fund consisting of 65% stocks
and 35% bonds. The expected return on stocks is 13.25% per year and
the expected return on bonds is 4.75% per year. The standard
deviation of stock returns is 42.00% and the standard deviation of
bond returns 14.00%. The stock, bond and risk-free returns are all
uncorrelated.
What is the expected return on the mutual fund?
What is the standard...

Part A: Assume the risk–free rate is 3.50%.
Using the stock and bond portfolios from problem 1, what is the
bond weight in the tangency portfolio formed by creating the
optimal risky portfolio from this stock and bond
portfolio? Enter your answer rounded to two
decimal places
STOCK AND BOND INFO:
You put 70% of your money in a stock portfolio that
has an expected return of 14.95% and a standard deviation of 44%.
You put the rest of you
money...

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 sure rate of 5.5%. The probability distributions of
the risky funds are:
Expected Return
Standard Deviation
Stock fund (S)
15
%
32
%
Bond fund (B)
9
%
23
%
The correlation between the fund
returns is 0.15.
a.
What...

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 sure rate of 5.5%. The probability distributions of
the risky funds are:
Expected Return
Standard Deviation
Stock fund (S)
15%
32%
Bond fund (B)
9
23
The correlation between the fund returns is 0.15.
What is the Sharpe ratio for the minimum variance...

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 sure rate of 4.8%. The probability distributions of
the risky funds are:
expected return standard deviation
Stock Fund ( S )---------18%-------------38%
Bond Fund ( B )----------9----------------32
the correlation between the fund returns is .13
Standard deviation of optimal risky portfolio is 30.92%....

A pension fund manager is considering three mutual funds. The
first is a stock fund, the second is a long-term bond fund, and the
third is a money market fund that provides a safe return of 8%. The
characteristics of the risky funds are as follows:
Expected Return
Standard Deviation
Stock fund (S)
16
%
35
%
Bond fund (B)
12
15
The correlation between the fund returns is 0.13.
Solve numerically for the proportions of each asset and for...

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%. The probability distribution of the risky
funds is as follows:
Expected Return
Standard Deviation
Stock fund
(S)
17
%
35
%
Bond fund (B)
14
18
The correlation
between the fund returns is 0.09.
Solve numerically for
the proportions...

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 5.5%. The probability distribution of the
risky funds is as follows:
Expected Return
Standard Deviation
Stock fund (S)
15%
32%
Bond fund (B)
9
23
The correlation between the fund returns is 0.15.
Solve numerically for the proportions of each...

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 9%. The probability distribution of the risky
funds is as follows:
Expected Return Standard Deviation
Stock fund (S) 17 % 38 %
Bond fund (B) 13 18
The correlation between the fund returns is 0.12.
Solve numerically for the proportions of...

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 7%. The probability distribution of the risky
funds is as follows:
Expected Return
Standard Deviation
Stock fund (S)
19
%
31
%
Bond fund (B)
14
23
The correlation between the fund returns is 0.10.
Solve numerically for the proportions...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 23 seconds ago

asked 20 minutes ago

asked 32 minutes ago

asked 53 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago