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II- (6pts) Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction w into a stock market mutual fund and

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II- (6pts) Suppose you have some money to invest-for simplicity, $1-and are planning to put a fraction w into a stock market mutual fund and the rest, 1- w, into a bond mutual fund. Suppose that a $1 invested in a stock fund yields R, after one year and a $1 invested in a bond fund yields R, . R, and R, are random variables with expected value of 9% and 7% respectively, and standard deviation of 4% and 2% respectively. The correlation between R, and R, is 0.75. If you place a fraction w of your money in the stock fund and the rest, 1-w, in the bond fund then the return on your investment will be R = WR, + (1-w)R, . The risk associated with your investment is measured by the standard deviation. a. If you decide to invest 60% of your $1 in stock and the rest in bond, then what is the expected return of your investment? What is its associated risk? (2pts) b. What share of your $1 money should you invest in stock in order to expect a 8.6% return on your investment? For that same share i.e. invested in stock, what level o risk is associated with your investment? (2pts) C. What share of your $1 money should you invest in stock mutual fund i order for your investment risk to be 3%? (you can show your work using algebra, calculus). (2pts)

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