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 rate of 8%. The probability distribution of the risky funds is as follows:

Expected Return Standard Deviation

Stock fund (S) 20% 30%

Bond fund (B) 12% 15%

a. Solve numerically for the proportions of each asset and for the expected return and standard

deviation of the optimal risky portfolio. Suppose correlation between stock funds and bond

funds is 0.1.

b. What is the Sharpe ratio of the best feasible CAL?

you require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL.

c . What is the standard deviation of your portfolio?

d. What is the proportion invested in the T-bill fund and each of the two risky funds?