The following data apply to Problems 4 through 10: A pension fund manager is considering 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 rate of 8%. The probability distribution of the risk funds is as follows. Stock fund (S) Expected return 20% standard deviation 30%. Bond fund (B) Expected return 12% and standard deviation 15%, The correlation between the fund returns is .10.

1. What is the Sharpe ratio of the best feasible CAL?

2. You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio?

b. What is the proportion invested in the T-bill fun and each of the two risky funds?

3. If you were to use only the two risky funds, and still require an expected return of 14%, what would be the investment proportions of your portfolio in Problem 2. What do you conclude?