A pension fund manager is considering three mutual funds. The first is an equity fund, the second is a long-term debt fund, and the third is a treasury-bill money market fund that yields a secure rate of 8%. The probabilities of the risky portfolio are as follows:

Expected return Standard deviation

Equity fund (E) 25% 35%

Debt fund (D) 15% 18%

The correlation between the funds returns is 0.10

1. What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return?

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

3. What is the reward-to-volatility ratio of the best feasible capital allocation, CAL ?

4. If the required yield of the full portfolio is expected at 14%,and that the portfolio be efficient on the best feasible capital allocation, 4.1) what is the standard deviation of the portfolio? 4.2) What is the proportion invested in the T-bill fund and each of the two risky funds?

5. If only risky funds were to be used and still expected return of were required at14%, what would be the investment proportions of the portfolio? Compare its standard deviation to that of the optimized portfolio in question 4. What do you conclude?