Assumptions for problems 4-10: A pension fund manager is considering three mutual funds. The fist 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 rate of 8%. The probability distribution of risky funds is as follows:

Fund Expected Return Standard Deviation

Stock Fund (S) 20% 30%

Bond Fund (B) 12% 15%

The correlation between the two funds is 0.10.

Problem 9: You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL?

Part a: What is the standard deviation of your portfolio?

Part b: What is the proportion invested in the T-Bill fund and each of the two risky assets?

Problem 10: If you were to use only the two risky funds, and still require an expected return of 14%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio in Problem #9. What do you conclude?