Question
In: Finance
A pension fund manager is considering three mutual funds. The first is a stock fund, 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 5.4%. The probability distributions of
the risky funds are:
| Expected Return | Standard Deviation | |||
| Stock fund (S) | 15 | % | 44 | % |
| Bond fund (B) | 8 | % | 38 | % |
The correlation between the fund returns is .0684.
Suppose now that your portfolio must yield an expected return of
13% and be efficient, that is, on the best feasible CAL.
What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Stocks ________%
Bonds ________%
Solutions
Expert Solution
Portfolio Ret = weighted avg ret of securities in that portfolio.
| Stock | Weight | Ret | WTd Ret |
| Stock | y | 0.1500 | 0.15y |
| Bond | 1-y | 0.0800 | 0.08 - 0.08y |
| Portfolio Ret Return | 0.08 - 0.07y |
Thus 0.08 - 0.07y = 0.13
0.07y = 0.13 - 0.08
= 0.05
y = 0.05 /0.07
= 0.7143 I.e 71.43%
Investment in STocks= 71.43%
Investment in Bond = 28.57%
jeff jeffy answered 2 years agoRelated Solutions
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