Use the following for parts A-D:

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows"

	Expected Return	Standard Deviation
Stock fund (s)	20%	30%
Stock fund (b)	12	15

The correlation between the fund returns is .10.

a) What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what are the expected value and standard deviation of its rate of return?

b) Tabulate and draw the investment opportunity set of the two risky funds. Use investment propor-tions for the stock fund of 0% to 100% in increments of 20%.

c) Draw a tangent from the risk-free rate to the opportunity set. What does your graph show for the expected return and standard deviation of the optimal portfolio?"

d) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio.