A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 4%. The characteristics of the risky funds are as follows: Expected Return Standard Deviation Stock fund (S) 23% 29% Bond fund (B) 14 17 The correlation between the fund returns is 0.12. You require that your portfolio yield an expected return of 12%, and that it be efficient, that is, on the steepest feasible CAL. Required: What is the standard deviation of your portfolio? What is the proportion invested in the money market fund and each of the two risky funds?

Requirement A

Standard Deviation

Requirement B

Money market fund

socks

Bond