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 rate of 7%. The probability distribution of the risky funds is as follows: (2.5 points)

Expected Return

Standard Deviation

Stock fund (S)

22

%

32

%

Bond fund (B)

12

19

The correlation between the fund returns is 0.11.You require that your portfolio yield an expected return of 11%, and that it be efficient, on the best feasible CAL.

I.What is the standard deviation of your portfolio?

II.What is the proportion invested in the T-bill fund and each of the two risky funds?