16) There are 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%. The probability distributions of the risky funds are: Expected Return Standard Deviation Stock funds (S) 14% 30% Bond funds (8) 20% The stock funds and Bond funds are independent (the correlation coefficient pus = 0) a. Suppose you can only invest in two of the three mutual funds and you have $1000 to invest. You are a risk-averse investor and you want to have an expected return of 12%, which two funds would you pick and how would you allocate the $1000 into the two funds? (7 points) 10% b. Use the formula below to compute the optimal portfolio weights. What is the Sharpe ratio of the best CAL? You manage $1000 for your client and your client wants an expected return of 10%. How much money do you invest in each of the three funds? (5 points) [ECre) - ry]o} - [ECrs) rokasPes [ECOB) - ry]os + [E(rs) ro - [E(ra) - ry +E(rs) rapospas Wa ws=1