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 sure rate of $5\mathrm{.}5\%.$

$$The probability distributions of the risky funds are: Stockfund S Expected return is $15\%$& Standard Deviation is $32\%$ Bondfund B Expected return is $9\%$ & Standard Deviation is $23\%$

The correlation between the fund returns is $\mathrm{.}155$

Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of $0\%$ to $100\%$in increments of $20\%.$

$1.$ What expected return and standard deviation does your graph show for the minimum variance portfolio?

$2$ What is the reward Volatility ratio of the best feasible CAL?

$3$ Suppose now that your portfolio must yield an expected return of

$12\%$ and be efficient, that is$,$ on the best feasible CAL.

a$.$

$$What is the standard deviation of your portfolio?

b$.$

What is the proportion invested in the T bill fund and each of the two risky funds

$4$

If you were to use only the two risky funds and still require an expected return of

$12\%,$w hat would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimal portfolio in the previous problem. What do you conclude.