A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given in the following table.FundExpected ReturnStandard DeviationStock fund10%15%Bond fund 8%12.5%The correlation coefficient between the stock and the bond funds is 0.20. What is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the bond fund?

GIVEN, RS=10%RB=8%σS=15%σB=12.5%WS=0.6WB=0.4CORREL=0.2

Answered: A pension fund manager is considering…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 5P

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A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given in the following table.

Fund	Expected Return	Standard Deviation
Stock fund	10%	15%
Bond fund	8%	12.5%

The correlation coefficient between the stock and the bond funds is 0.20.

What is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the bond fund?

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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