Question

I- (6 pts) Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction

into a stock market mutual fund and the rest ( ), into a bond mutual fund. Suppose that a $1 invested

in a stock fund yields ??after one year and a $1 invested in a bond fund yields . ?? and are random

variables with expected value of 9% and 6% respectively, and standard deviation of 5% and 3% respectively.

The correlation between ?? and is 0.70. If you place a fraction of your money in the stock fund and

the rest ( ), in the bond fund then the return on your investment will be . The

risk associated with your investment is measured by the standard deviation.

a. If you decide to invest 60% of your $1 in stock and the rest in bond, then what is the expected

return of your investment? What is its associated risk? (2pts)

b. What share of your $1 money should you invest in bond in order to expect a 8% return on your

investment? For that same share i.e. invested in stock, what level of risk is associated with your

investment? (2pts)

c. What share of your $1 money should you invest in stock mutual fund in order for your investment

risk to be 4%? (you can show your work using algebra, or calculus). (2pts)

Answer 1