A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a government bond fund and the third is a T-bill money market fund. The expected returns and standard deviations of the funds are:

Expected return Standard deviation

Stock fund (S) 20% 30%

Bond fund (B) 12% 15%

T-bill money market fund 8% 0%

The correlation between the stock and bond fund is 0.10

A. What are the stock and bond weights in the minimum variance portfolio?

B. What is the expected return and standard deviation of the minimum variance portfolio?

C. What are the stock and bond weights in the optimal risky portfolio?

D. What is the expected return and standard deviation of the optimal risky portfolio?

E. (5 points) Write down the equation of the capital allocation line ( i.e., the line connecting the risk free rate to the optimal risky portfolio).

F. If you invest in a portfolio on the capital allocation line that has an expected return of 14%, what is the portfolios standard deviation?