A pension fund manager is considering three mutual funds. The first one is a stock fund, the second one 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 return Standard deviation |Stock fund (S) Bond fund (B) 20% 30% 12% 15% The correlation between the fund returns is 0.10 a) What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return? b) Tabulate the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of zero to 100% in increments of 20%. c) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. d) What is the reward-to-volatility ratio of the best feasible CAL? e) You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL, What is the standard deviation of your portfolio? • What is the proportion invested in the T-bill fund and each of the two risky funds?

A pension fund manager is considering three mutual funds. The first one is a stock fund, the second one 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 return Standard deviation |Stock fund (S) Bond fund (B) 20% 30% 12% 15% The correlation between the fund returns is 0.10 a) What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return? b) Tabulate the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of zero to 100% in increments of 20%. c) Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. d) What is the reward-to-volatility ratio of the best feasible CAL? e) You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL, What is the standard deviation of your portfolio? • What is the proportion invested in the T-bill fund and each of the two risky funds?

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 2FPE

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