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 4.0%. The probability distributions of the risky funds are:

Expected Return STD DEV.

Stock Fund (S) 10% 32%

Bond Fund (B) 7% 24%

The correlation between the fund returns is .1250.

Suppose now that your portfolio must yield an expected return of 8% and be efficient, that is, on the best feasible CAL.

a. What is the standard deviation of your portfolio? %

b-1. What is the proportion invested in the T-bill fund? %

b-2. What is the proportion invested in each of the two risky funds?

Proportion Invested

Stocks %

Bonds %