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 sure rate of 5.7%. The probability distributions of the risky funds are:

	Expected Return	Standard Deviation
Stock fund (S)	18%	47%
Bond fund (B)	7%	41%

The correlation between the fund returns is 0.0317.

What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Answer 1

Return of Stock Fund (Rs) = 18%

Return of Bond Fund (Rb) = 7%

SDs = 47%

SDb = 41%

Correlation(s.b) R(s,b) = 0.0317

Cov(s,b) = R(s,b) * SDs * SDb

= 0.0317 * 47 * 41

= 61.0859

Optimum weight of Bond (Wb) =

=

= 57%

Weight of Stock Fund (Ws) = 100 % - 57% = 43%

Expected Return = Ws * Rs  + Wb * Rb

= 0.43 * 18% + 0.57 * 7%

= 11.73%

SD =

=

=

= 31.38%

Sharpe ratio =  

=

= 0.192160

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.