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In: Finance

For the next 7 questions suppose the following probability distribution for Stock Fund (S) and Bond...

For the next 7 questions suppose the following probability distribution for Stock Fund (S) and Bond Fund (B) holds:

Expected Return

SD (σ)

Correlation Coefficient

Bond Fund

10%

10%

0

Stock Fund

15%

25%


What is the covariance between the Stock Fund and the Bond Fund?

-120

-100

-75

-60

0

What is the expected return on a portfolio which is 40% invested in the stock fund and the rest in the bond fund?

10%

12%

13%

14%

16%

What is the standard deviation of the return on the above portfolio?

9.98%

10.58%

11.66%

13.56%

14.56

Now, introduce the risk-free asset. If the risk-free rate of return is 8%, what is the proportion of the optimal (tangent) risky portfolio, invested in Stock Fund?

15.33%

18.18%

23.33%

33.33%

35.90%

What is the expected return on the optimal (tangent) risky portfolio?

11.67%

11.80%

13.33%

14.87%

15.17%

What is the standard deviation of the return on the optimal (tangent) risky portfolio?

9.21%

9.57%

10.67%

11.03%

13.54%

Solutions

Expert Solution

jeff jeffy answered 8 months ago
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