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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% |
|
- Find the investment proportions in the minimum variance portfolio (MVP) of the two risk asset (5 points)
- Find the expected return and standard deviation for the minimum variance portfolio (5 points)
- 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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