Question

1. 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.

   

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

   

Reward-to-volatility ratio

2.Consider the following table:

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.10	−28%	−10%
Mild recession	0.20	−8%	12%
Normal growth	0.35	4%	2%
Boom	0.35	42%	7%

Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

covariance

Answer 1

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