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4 - The following data apply to Problems 4 . a through 4 . g: A pension fund manager is considering three mutual funds. The
The following data apply to Problems a through g: A pension fund manager is
considering three mutual funds. The first is a stock fund, the second is a longterm government
and corporate bond fund, and the third is a Tbill money market fund that yields a rate of
The probability distribution of the risky funds is as follows: Points
The correlation between the fund returns is
a What are the investment proportions in the minimumvariance portfolio of the two risky funds, and
what is the expected value and standard deviation of its rate of return?
Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions
for the stock fund of zero to in increments of
c Draw a tangent from the riskfree rate to the opportunity set. What does your graph show for the
expected return and standard deviation of the optimal portfolio?
Solve numerically for the proportions of each asset and for the expected return and standard deviation
of the optimal risky portfolio.
What is the Sharpe ratio of the best feasible CAL?
f You require that your portfolio yield an expected return of and that it be efficient, on the best
feasible CAL.
f What is the standard deviation of your portfolio?
f What is the proportion invested in the Tbill fund and each of the two risky funds?
If you were to use only the two risky funds, and still require an expected return of what would
be the investment proportions of your portfolio? Compare its standard deviation to that of the
optimized portfolio in Problem What do you conclude?
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