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 4%. The probability distribution of the risky funds is as follows:

	Expected Return	Standard Deviation
Stock fund (S)	22%	37%
Bond fund (B)	14	23

The correlation between the fund returns is 0.10.

What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

Sharpe ratio

B.)

Suppose that there are many stocks in the security market and that the characteristics of stocks A and Bare given as follows:

Stock	Expected Return				Standard Deviation
A		11	%			6	%
B		17				9
	Correlation = 1

Suppose that it is possible to borrow at the risk-free rate, r_f . What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places. Omit the "%" sign in your response.)

Risk-free rate

%