Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A pension fund manager is considering three mutual funds: a stock fund, a long-term bond fund and a money market fund that provides a risk-free

A pension fund manager is considering three mutual funds: a stock fund, a long-term bond fund and a money market fund that provides a risk-free return of 8%. Correlation coefficient between the fund returns is 0.15. The first two moments of the risky funds are as follows:

Expected return

Standard deviation

Stock fund (S)

20%

30%

Bond fund (B)

12%

15%

(a) Mr Richard wants to invest $10,000 in the optimal risky portfolio consisting of stock fund and bond. How much fund should he invest in stock fund? In bond fund?

(b) Compute the expected return of the optimal risky portfolio.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Principles And Practices

Authors: Timothy J. Gallagher

9th Edition

1954156103, 978-1954156104

More Books

Students also viewed these Finance questions