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Background information: an investment manager is considering three mutual funds: stock fund, long-term government and corporate bond fund, and T-Bill money market fund with yield

Background information: an investment manager is considering three mutual funds: stock fund, long-term government and corporate bond fund, and T-Bill money market fund with yield = 5.5%. The probability distributions of the risky funds are as followings:

Expected return Standard Deviation

Stock Fund (S) 15% 32%

Bond Fund (B) 9% 23%

The correlation between the fund return = 0.15

Suppose your portfolio must yield an expected return of 12% and be efficient, i.e. on the best feasible Capital Allocation Line (CAL). Hint: CAL is a line created in a graph of all possible combinations of risky and risk-free assets. Also known as the "reward-to-variability ratio.

1). Whats the standard deviation of your portfolio? Show your calculations. (4 points)

2). Whats the proportion invested in the T-Bills fund and each of the two risk funds? Show your calculations. (4 points)

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