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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
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 risk-free rate of 2%. The probability distributions of the risky funds are:
| Expected Return | Standard Deviation |
Stock funds (S) | 12% | 15% |
Bond funds (B) | 5% | 8% |
The correlation coefficient between the returns of stock funds and bond funds, , is 0.1
- You invest 50% in the T-bill money market fund and 50% in the bond fund. What is your expected return and standard deviation?
- You invest 50% in the stock fund and 50% in the bond fund. What is your expected return and standard deviation?
- You invest only in the stock fund and bond fund. You want an expected return of 8%. What is the standard deviation of your portfolio?
- You invest in all three funds. Use the formula below to compute the optimal portfolio weights. What is the sharp ratio of the best CAL? You manage $1000 for your client and your client wants an expected return of 8%. How much money do you invest in each of the three funds?
- Is the standard deviation of your complete portfolio from d) higher or lower than that in c). Show where your portfolios in c) and d) are on the expected return-standard deviation graph.
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