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 statistics from the probability distribution of the risky funds are:

	Expected Return	Standard Deviation
Stock Fund (S)	15%	32%
Bond Fund (B)	9%	23%

The correlation between the fund returns is 0.15. What is the expected return and standard deviation for the optimal risky portfolio? Hint: see formula 6.10, p. 162 for determination of weights.

( the answer is W_B = 0.3534; W_S = 0.6466; E(r_p) = 12.88%; _p = 23.3377% )

Draw the CAL of this particular portfolio. Label the point for the optimal risky portfolio with the label O