Question
A pension fund manager is considering three mutual funds. The first is a stock fund, the...
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 portfolio (MVP)?
[Hint: The minimum-variance CAL is the line joining the risk-free asset to the minimum-variance portfolio (MVP). Now calculate slope of line after characterizing the minimum-variance portfolio.]
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