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 sure rate of 4.8%. The probability distributions of the risky funds are: expected return standard deviation Stock Fund ( S )---------18%-------------38% Bond Fund ( B )----------9----------------32 the correlation between the fund returns is .13

Standard deviation of optimal risky portfolio is 30.92%. If you were to use only the two risky funds and still require an expected return of 15% , what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimal portfolio in the previous problem. What do you conclude?