Question
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a bond fund, and the third is
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a bond fund, and the third is a T-bill fund that yields a rate of 8%. The correlation between the fund returns is 0.1. The expected returns and the standard deviations are as follows:
Expected return | SD | |
Stock fund | 20% | 30% |
Bond fund | 12% | 15% |
a. What are the investment proportions in the minimum-variance portfolio of the two risky funds? b. Calculate the expected return and standard deviation of the minimum-variance portfolio. c. Calculate the expected return and standard deviation of portfolios invested in the two risky funds with weights as follows:
d. Draw the investment opportunity set of the two risky funds and mark the minimum-variance portfolio (based on parts b and c).
e. You require an expected return of 14% on your portfolio, which consists of the two risky funds. Calculate the investment proportions of your portfolio and the standard deviation of the portfolio (Hint: use the portfolios expected return to calculate the investment weights of each fund. Remember that wBonds = 1 wStocks . Then use the weights to calculate the standard deviation of the portfolio).
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