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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,

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 3%. The probability distribution of the funds is as follows:

Expected Return

Standard Deviation

Stock Fund

20%

40%

Bond Fund

10%

15%

Risk-free

3%

Correlation

20%

  1. Find the investment proportions in the minimum variance portfolio (MVP) of the two risk asset (5 points)
  2. Find the expected return and standard deviation for the minimum variance portfolio (5 points)
  3. What portion of your wealth should go to S and B respectively to achieve the tangent portfolio (i.e., the portfolio with the highest Sharpe ratio) (5 points)

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