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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,
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. Analysts Kevin and Kate prepared the following table for the manager: Expected Return 12% 8% 1% 10% Standard Deviation 35% 24% Beta 1.2 0.8 Stock fund (S) Bond fund (B) T-bill fund (T) Market Index (M) 28% Notes: Correlation coefficient of stock fund and bond fund is 0.2 (a) Which is a better investment option, stock fund or bond fund? Hint: talk with numbers. (b) Kevin suggests the manager to consider investing in both the stock fund and bond fund to achieve the greatest Sharpe ratio. 1) What are the optimal weights for both fund? (ii) What's the Sharpe ratio of this portfolio? Hint: You can use 55% bond and 45% stock to calculate Sharpe ratio for part ii if you decide to skip part i or are not confident about the answer to part
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