A pension fund manager is considering three mutual funds. The first is a stock fund (S), the second is a long-term government and corporate fund (B), and the third is a T-bill money market fund that yields a rate of 7%. The probability distribution of the risky funds is as follows:

	Expected Return	Standard Deviation
Stock fund (S)	15%	25%
Bond fund (B)	10%	15%

The correlation between the fund returns is 0.2

a. What is the Sharpe ratio of the best feasible CAL? (8 mark)

b. You require that your portfolio yield an expected return of 12%, and that it be efficient, on the best feasible CAL. What is the standard deviation of your portfolio? (4 marks)

c. Now you use only the two risky funds. Comparing to the standard deviation in question b, how much additionalstandard deviation would your portfolio have if you wanted to maintain your portfolios expected return at 12%? (8 marks)