A fund manager is considering three mutual funds. The first is stock fund second is long term corporate bond fund and third is a t-bill that yields a risk free rate of 5%

Stock fund - expected return 20% -standard deviation 40%

Bond fund - expected return 10% -standard deviation 25%

1. Draw a CAL line using stock fund as risky and t bill as risk free assets.

2. Draw a CAL line using bond fund as risky and t bill as risk free assets.

3. what are the mean and the standard deviation

Scenario - probability - rate of return

severe recesion - 0.1 - -30

mild recession - 0.3 - -10

normal growth - 0.4 - 15

boom - 0.2 - 20