Question

You are considering the risk-return profile of two mutual funds for investment. The relatively risky fund promises an expected return of 7% with a standard deviation of of 13%. The relatively less risky fund promises an expected return and standard deviation of 4.5% and 5.2%, respectively. Assume that the returns are approximately normally distributed.

a. Which mutual fund will you pick if your objective is to minimize the probability of earning a negative return?

b. Which mutual fund will you pick if your objective is to maximize the probability of earning a return above 9%?

Answer #1

A.

Mutual fund to pick if your objective is to minimize the probability of earning a negative return then choose the MF which doent give higher negative return.

Lets see, MFa = 7 - 13 = -6% and MFb = 4.5-5.2% = -0.7% return. we choose Mutual Fund 2nd because it has lesser negative return ( only -0.7% compared to -6% of the 1st MF)

**Choose 2nd MF.**

B.

To maximize above 9% we choose first MF because it given 7+13% or 20% return and 2nd MF gives just 4.5+5.2% or 9.7% or just 0.7 % above 9% return whereas the 1st one' giving 11% on top of 9% return.

**Choose 1st MF for this.**

You are considering the risk-return of two mutual funds for
investment. The relatively risky fund promises an expected return
of 14.7% with a standard of 15.6%. The relatively less risky fund
promises an expected return and standard deviation of 6.4% and
3.8%, respectively. Assume that the returns are approximately
normally distributed. Using normal probability calculations and
complete sentences, give your assessment of the likelihood of
getting, on one hand, a negative return and on the other, a return
above 10%...

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 5.2%. The probability distributions of
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Expected Return
Standard Deviation
Stock fund (S)
13%
42%
Bond fund (B)
6%
36%
The correlation between the fund returns is .0222.
What is 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 4.5%. The probability distributions of
the risky funds are:
Expected Return
Standard Deviation
Stock fund (S)
15%
35%
Bond fund (B)
6%
29%
The correlation between the fund returns is 0.0517.
What is the expected return and standard deviation 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 sure rate of 5.2%. The probability distributions of
the risky funds are:
Expected Return
Standard Deviation
Stock fund (S)
13%
42%
Bond fund (B)
6%
36%
The correlation between the fund returns is 0.0222.
What is the expected return and standard deviation for...

You are an investment manager considering two mutual funds. The
first is an equity fund and the second is a long-term corporate
bond fund. It is possible to borrow or to lend limitless sums
safely at 1.25%pa. The data on the risky funds are as follows:
Fund
Expected return
Expected standard deviation
Equity Fund
8%
16%
Bond Fund
3%
5%
The correlation coefficient between the fund returns is 0.10
a You form
a risky portfolio P that is equally weighted...

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 4.5%. The probability distribution of the
risky funds is as follows:
Expected Return
Standard Deviation
Stock fund (S)
15%
35%
Bond fund (B)
6
29
The correlation between the fund returns is 0.15.
Solve numerically for the proportions of each asset...

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 4.5%. The probability distribution of the
risky funds is as follows:
Expected
Return
Standard
Deviation
Stock fund (S)
15%
35%
Bond fund (B)
6
29
The correlation between the fund returns is 0.15.
Solve numerically for the proportions of each asset...

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)
16%
45%
Bond fund (B)
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39%
The correlation between the fund returns is .0385.
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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
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the risky funds are:
Expected
Return
Standard
Deviation
Stock fund (S)
20%
49%
Bond fund (B)
9%
43%
The correlation between the fund returns is .0721.
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