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 8%. The probability distribution of the risky funds is as follows:

	Expected Return	Standard Deviation
Stock fund (S)	20%	30%
Bond fund (B)	12	15

The correlation between the fund returns is .10.

Question 1

Not yet answered

Not graded

Flag question

Question text

What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return? (Round each answer to 4 decimal places.)

a. Weight in debt: Answer

b. Weight in equity:Answer

c. Expected value of rate of return: Answer

d. Standard deviation: Answer

Question 2

Not yet answered

Not graded

Flag question

Question text

Solve numerically for the proportion of each asset and for the expected return and standard deviation of the optimal risky portfolio.

(Round a. and b. to 6 decimal places.)

a. Weight in equity: Answer

b. Weight in debt: Answer

(Round c. and d. to 4 decimal places.)

c. Expected value of return: Answer

d. Standard deviation: Answer

Question 3

Not yet answered

Not graded

Flag question

Question text

What is the Sharpe ratio of the best feasible CAL? (Round your answers to 6 decimal places.)

Answer:

Question 4

Not yet answered

Not graded

Flag question

Question text

Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of zero to 100% in increments of 20%.

Stock	Bonds	E(r)	StdDev
0	1	Answer	Answer
0.2	0.8	Answer	Answer
0.4	0.6	Answer	Answer
0.6	0.4	Answer	Answer
0.8	0.2	Answer	Answer
1	0	Answer	Answer

Question 5

Not yet answered

Not graded

Flag question

Question text

Draw a tangent from the risk-free rate to the opportunity set. What does your graph show for the expected return and standard deviation of the optimal portfolio? (Note: You only need to draw the graph on your own paper and compare it with the answer. There is no need to upload your graph.)