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 8%. The characteristics of the risky funds are as follows:

Stock fund (S). Expected Return 20%. Standard Deviation 30%

Bond fund (B) Expected Return 12. Standard Deviation 15 The correlation between the fund returns is 0.10.

a) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio.

b) What is the Sharpe ratio of the best feasible CAL?

c) You require that your portfolio yield an expected return of 14%, and that it be efficient, that is, on the steepest feasible CAL.

1. What is the standard deviation of your portfolio?

2. What is the proportion invested in the money market fund and each of the two risky funds?