Question
An investor is considering investing $100,000 in three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond
An investor is considering investing $100,000 in 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 risk-free rate of 5 per cent. Returns on the stock fund and the bond fund have a correlation coefficient of 0.1 and the following characteristics:
Description | Expected Return | Standard Deviation |
Stock Fund | 17% | 20% |
Bond Fund | 9% | 12% |
Solve the following exercises in the order you think appropriate, but please make sure you answer all of them.
A. When picking the optimal risky-portfolio, how much will the investor invest in each of the risky mutual funds?
B. What is the expected value, standard deviation and the Sharpe ratio of the optimal risky portfolio?
C. If the investor has a standard utility function over returns and has a risk aversion coefficient of 3, how much will the investor invest in the risk-free mutual fund?
D. What is the expected value, standard deviation and the Sharpe ratio of the optimal portfolio?
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