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Suppose that you are considering investing in three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond

Suppose that you are 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%. You can also borrow at the risk-free 2% rate. The expected returns and standard deviations of the risky funds are:

Expected Return

Standard Deviation

Stock fund (S)

10%

15%

Bond fund (B)

4%

8%

The correlation coefficient between the returns of stock fund and bond fund, is 0.2

You can invest only in the stock fund and the bond fund . You want an expected return of 8%. What is the standard deviation of your portfolio?

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