A pension fund manager is considering three mutual funds. The fist 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 risky funds is as follows:

Fund Expected Return Standard Deviation

Stock Fund (S) 20% 30%

Bond Fund (B) 12% 15%

The correlation between the two funds is 0.10.

Tabulate (no need to draw) the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of 0% to 100% in increments of 20%.

Proportion of S Proportion of B	E[rP]	P
0% _______	_______	_______
20% _______	_______	_______
40% _______	_______	_______
60% _______	_______	_______
80% _______	_______	_______
100% _______	_______	_______

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

What is the Sharpe Ratio of the best feasible CAL?

You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL? What is the standard deviation of your portfolio? What is the proportion invested in the T-Bill fund and each of the two risky assets?

If you were to use only the two risky funds, and still require an expected return of 14%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio in problem above. What do you conclude?