$7-8)$

Suppose that you are considering investing in two mutual funds for your client. The security analysts at your firm estimate the probability distribution of the two risky funds as follows:

Stock Fund

Expected Return

$14\%$

Bond Fund

$6\%$

Standard Deviation

$25\%$

$8\%$

A risk$-$free fund has a return of $4\%$

Correlation coefficient $=\mathrm{.}2$

Suppose there is no risk$-$free asset $($i$.$e$.,$ no ability to borrow$)$ and your client requires an expected return of $28\%.$ What is the standard deviation of the portfolio?

A$)34\mathrm{.}23\%$

B$)45\mathrm{.}21\%$

C$)55\mathrm{.}12\%$

D$)67\mathrm{.}36\%$

E$)$ None of the above

Continue to assume your client requires an expected return of $28\%,$ but now assume you are allowed to borrow at the risk$-$free rate of $4\%.$ What is the standard deviation $($Hint: use your optimal risky portfolio expected return and standard deviation from $6)?$

A$)22\mathrm{.}76\%$

B$)32\mathrm{.}41\%$

C$)44\mathrm{.}87\%$

D$)55\mathrm{.}10\%$

E$)$ None of the above

$4$

$7-8$

Suppose that you are considering investing in two mutual funds for your client. The security analysts at your firm estimate the probability distribution of the two risky funds as follows:

Stock Fund

Expected Return

Standard Deviation

Bond Fund

$14\%$

$25\%$

$6\%$

$8\%$

A risk$-$free fund has a return of $4\%$

Correlation coefficient $=\mathrm{.}2$

Suppose there is no risk$-$free asset $($i$.$e$.,$ no ability to borrow$)$ and your client requires an expected return of $28\%.$ What is the standard deviation of the portfolio?

A$)34\mathrm{.}23\%$

B$)45\mathrm{.}21\%$

C$)55\mathrm{.}12\%$

D$)67\mathrm{.}36\%$

E$)$ None of the above

Continue to assume your client requires an expected return of $28\%,$ but now assume you are allowed to borrow at the risk$-$free rate of $4\%.$ What is the standard deviation $($Hint: use your optimal risky portfolio expected return and standard deviation from $6)?$

A$)22\mathrm{.}76\%$

B$)32\mathrm{.}41\%$

C$)44\mathrm{.}87\%$

D$)55\mathrm{.}10\%$

E$)$ None of the above