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Please show work. There is no critical assumption |- (6 pts) Suppose you have some money to invest-for simplicity, $1-and are planning to put a
Please show work.
There is no critical assumption
|- (6 pts) 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 Rs after one year and a $1 invested in a bond fund yields R . Rs and R, are random variables with expected value of 9% and 7% respectively, and standard deviation of 5% and 3% respectively. The correlation between Rs and R, is 0.80. 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 bond in order to expect a 8.5% return on your investment? For that same share i.e. invested in bond, what level of risk (in terms of standard deviation) is associated with your investment? (2pts) C. What share of your $1 money should you invest in stock mutual fund in order for your investment risk to be 4%? (you can show your work using algebra, or calculus). (2pts)Step by Step Solution
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