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 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) | 7 | % | 39 | % |
The correlation between the fund returns is .0385.
Suppose now that your portfolio must yield an expected return of
14% and be efficient, that is, on the best feasible CAL.
What is the standard deviation of your portfolio? What is the proportion invested in the T-bill fund? What is the proportion invested in each of the two risky funds?