You are a pension fund manager, are 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 risk-free rate of 2%. 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 0.1

1. You invest 50% in the T-bill money market fund and 50% in the bond fund. What are your expected return and standard deviation?
2. You invest only in the stock fund and bond fund. You want an expected return of 8%. What is the standard deviation of your portfolio?
3. You invest in all three funds. Use the formula for the weights of the optimal risky portfolio to compute the optimal portfolio weights. What is the Sharpe ratio of the best CAL? You manage $1000 for your client and your client wants an expected return of 8%. How much money do you invest in each of the three funds?