In: Finance
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 5%. The probability distribution of the risky funds is as follows:
Expected Return Standard
Deviation
Stock fund (S) 17
% 38 %
Bond fund (B) 13
18
The correlation between the fund returns is 0.12.
You require that your portfolio yield an expected return of 12%, and that it be efficient, on the best feasible CAL.
a. What is the standard deviation of your portfolio?
b. What is the proportion invested in the T-bill fund and each of
the two risky funds?