Question

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 8%. The probability distribution of the risky funds is as follows:

	Expected Return			Standard Deviation
Stock fund (S)		21	%		28	%
Bond fund (B)		12			18

The correlation between the fund returns is 0.09.

a-1. What are the investment proportions in the minimum-variance portfolio of the two risky funds. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

a-2. What is the expected value and standard deviation of its rate of return? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

PLEASE SHOW ALL WORK INCLUDING ALGEBRA STEPS WHEN SOLVING Ws EQUATION THANK YOU

Answer 1

a1.

We can find proportions of stock in the minimum variance portfolio of two stocks with following formula :

where,

Ws = proportion of S

S = stock fund

B = bond fund

Putting the values :

a.2

Expected Return (E(rp) of minimum variance portfolio :

putting the values :

Standard deviation of Minimum variance portfolio :

putting the values :