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, and the third is a T-bill money market fund that yields a rate of 8%. The mean and the standard deviation of the risky funds is as follows:

	Expected Return	Standard Deviation
Stock fund (S)	20%	30%
Bond fund (B)	12%	15%

The correlation between the fund returns is 0.10.

Your clients degree of risk aversion is A = 3.5. Given the utility function: U = E(r) - 1/2 A Sigma^2

What proportion, y, of the total investment should be invested in the tangency portfolio so that your client can maximize his/her expected utility?

What is the expected value and standard deviation of the rate of return on your clients optimized portfolio?