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Problem 6: An investor is considering investing in three mutual funds. The first is a stock fund, the second is a long-term government and corporate
Problem 6: An investor is considering investing 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 2 percent. Returns on the stock fund and the bond fund are uncorrelated and the following characteristics: Description Expected Return Standard deviation Stock fund Bond fund 1 30 5% 10% Solve the following exercises in the order you think appropriate, but please make sure you A: When picking the optimal risky-portfolio, how much will the investor invest in each of B: What is the expected value, standard deviation and the Sharpe ratio of the optimal answer all of them. the risky mutual funds? risky portfolio? C: If the investor has a standard utility function over returns and has a risk aversion coefficient of 2, 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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