A portfolio manager is considering investing in two mutual funds and the risk free asset (T-Bills). The data for these securities is give by: ER. σ Stock Fund (S) 18% 23% Bond Fund(B) 6% 13% T-Bill 5% 0% The correlation between the two funds is -0.1 One mutual fund’s portfolio, M, is reached by investing 42% in stocks and 58% in bonds. Calculate the expected return, standard deviation and Sharpe Ratio of this and draw the Capital Allocation Line (CAL) that is associated with the portfolio M you calculated in (a). In addition, sketch the minimum variance frontier in the same graph (no further calculations needed). Indicate on your graph which part of the frontier is the efficient set.
A
ER. σ
Stock Fund (S) 18% 23%
Bond Fund(B) 6% 13%
T-Bill 5% 0%
The correlation between the two funds is -0.1
One mutual fund’s portfolio, M, is reached by investing 42% in stocks and 58% in bonds.
Calculate the expected return, standard deviation and Sharpe Ratio of this and draw the Capital Allocation Line (CAL) that is associated with the portfolio M you calculated in (a). In addition, sketch the minimum variance frontier in the same graph (no further calculations needed). Indicate on your graph which part of the frontier is the efficient set.
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