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 6%. The probability distribution of the risky funds is as follows:

	Expected Return			Standard Deviation
Stock fund (S)		17	%		38	%
Bond fund (B)		12			17

The correlation between the fund returns is 0.13.

You require that your portfolio yield an expected return of 11%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Round your intermediate calculations to 4 decimal places. Round your answer to 2 decimal places.)

Standard deviation            %

b. What is the proportion invested in the T-bill fund and each of the two risky funds? (Round your intermediate calculations to 4 decimal places. Round your answers to 2 decimal places.)

	Proportion Invested
T-bill fund			%
Stocks			%
Bonds			%

Answer 1