Robert is a fund manager in Man group. He is considering three funds. The first is a stock fund, the second is a corporate bond fund, and the third is a T-bill money market fund (with a sure rate). The expected returns and standard deviations of the funds are as follows: Expected Return Standard Deviation Stock fund 12% 0.3 Bond fund 6% 0.2 T-bill money market fund 2% - The correlation coefficient between the bond and stock funds returns is 0.3. a. What is the covariance between the bond and stock funds returns? b. Robert allocated 35% of the money under management to the Stock fund and the rest to the Bond fund. What is the expected return and the standard deviation of Robert’s fund? c. One of Robert’s client would like to invest $10,000 in Robert’s fund and the T-bill money market fund. Looking at the client’s risk profile, Robert decides that a 15% standard deviation is appropriate for this client. How much money should be invested in Robert’s fund and how much money should be invested in the T-bill money market fund? d. Draw the CAL of Robert’s portfolio on an expected return/standard deviation diagram. What is the slope of the CAL?
Robert is a fund manager in Man group. He is considering three funds. The first is a stock fund, the second is a corporate bond fund, and the third is a T-bill
|
Expected Return |
Standard Deviation |
|
|
Stock fund |
12% |
0.3 |
|
Bond fund |
6% |
0.2 |
|
T-bill money market fund |
2% |
- |
The correlation coefficient between the bond and stock funds returns is 0.3.
a. What is the covariance between the bond and stock funds returns?
b. Robert allocated 35% of the money under management to the Stock fund and the rest to the Bond fund. What is the expected return and the standard deviation of Robert’s fund?
c. One of Robert’s client would like to invest $10,000 in Robert’s fund and the T-bill money market fund. Looking at the client’s risk profile, Robert decides that a 15% standard deviation is appropriate for this client. How much money should be invested in Robert’s fund and how much money should be invested in the T-bill money market fund?
d. Draw the CAL of Robert’s portfolio on an expected return/standard deviation diagram. What is the slope of the CAL?
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