A Pension Fund Manager is considering three mutual funds. The first is a stock fund, the second is a long-term government bond fund, and the third is a t-bill money market fund yielding 5.5%. The correlation between the fund returns is .15. The probability distribution of the risky funds are:

E( R )

STDEV

Stock Fund (S)

15%

32%

Bond fund (B)

9%

23%

First, tabulate and draw the investment opportunity set (meaning the different return and standard deviation combinations) of the 2 risky funds using proportions for the stock fund from 0% to 100% (and thus proportions of the bond fund from 100% to 0%) in increments of 20%.

1. What is the Return and standard deviation for the portfolio with 80% in the stock fund and 20% in the bond fund?

2. What is the Return and standard deviation for the portfolio with 20% in the stock fund and 80% in the bond fund?

3. What is the return and standard deviation of the Minimum Variance Portfolio?

4. What is the return and standard deviation on the Optimal Risky portfolio?

A Pension Fund Manager is considering three mutual funds. The first is a stock fund, the second is a long-term government bond fund, and the third is a t-bill money market fund yielding 5.5%. The correlation between the fund returns is .15. The probability distribution of the risky funds are: E(R) STDEV Stock Fund (5) 15% 32% Bond fund (B) 9% 23% First, tabulate and draw the investment opportunity set (meaning the different return and standard deviation combinations) of the 2 risky funds using proportions for the stock fund from 0% to 100% (and thus proportions of the bond fund from 100% to 0%) in increments of 20%