Question
Sam Doyle's financial advisor tells her that she should invest her money by allocating it into 2 diversified mutual funds, a stock fund, and a
Sam Doyle's financial advisor tells her that she should invest her money by allocating it into 2 diversified mutual funds, a stock fund, and a bond fund. He says that she can expect the stock fund to return 12% a year, but it has high volatility of 25%. The bond is less risky as its volatility is 8%, but the expected return is only 3%. The correlation of returns between the stock fund and a bond fund is 0.3. What fraction of her assets should she put in the stock fund, and what fraction should she put in the bond fund if she wants to earn 10% on her money?
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