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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,

  1. 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 5.5%. The probability distributions of the risky funds are:

    • Stock Fund (S): Expected return = 12% and standard deviation = 32%
    • Bond Fund (B): Expected return = 8% and standard deviation = 23%
    • The correlation between the fund returns is 0.15.

    Which of the following is closest to the expected return for the optimal risky portfolio?

    9.26%

    19.94%

    10.53%

    23.06%

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