A pension fund manager is 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 rate of 8%. The probability distribution of the risky funds is as follows: Expected ReturnStandard DeviationStock fund (S)16%32% Bond fund (B)10%23% The correlation between the fund returns is 0.20.Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL.What is the standard deviation of your portfolio?b-1. What is the proportion invested in the T-bill fund? b-2. What is the proportion invested in each of the two risky funds?

Answered: A pension fund manager is considering…

An optimal portfolio refers to a portfolio of investments that offers the highest expected return…

Expected Return

Standard Deviation

Stock fund (S)

Bond fund (B)

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. 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 rate of 8%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.20.

Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL.

What is the standard deviation of your portfolio?

b-1. What is the proportion invested in the T-bill fund?

b-2. What is the proportion invested in each of the two risky funds?

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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