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

FUND                  EXPECTED RETURN                       STANDARD DEVIATION

Stock (S)                           20%                                                  30%

Bond (B)                           12%                                                  15%

NOTE: The correlation between the fund returns is .10.

What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return?

Answer 1