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 fund, and the third is a T-bill money

market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are:

Expected Return

Standard Deviation

Stock fund (S)

15%

32%

Bond fund (B)

9

23

The correlation between the fund returns is .15.

Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL.

a.What is the standard deviation of your portfolio?

b. What is the proportion invested in the T-bill fund and each of the two risky funds?