Question
(17 points) Consider three mutual funds: a stock fund, a long-term bond fund, and a T-bill money market fund (risk-free asset). We have: Expected Return
(17 points) Consider three mutual funds: a stock fund, a long-term bond fund, and a T-bill money market fund (risk-free asset).
We have: Expected Return (%) Volatility (%) Stock Fund (S) 13% 20% Bond fund (B) 8% 12% T-bills (rf ) 5% 0.
The correlation between S and B is 0.10.
(a) Find the optimal risky portfolio, P.
(b) Find the expected return and volatility of the optimal risky portfolio P.
(c) Find the slope of the CAL supported by T-bills and portfolio P.
(d) How much will an investor with A=5 invest in the stock fund, the bond fund, and T-bills?
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