A pension fund manager is considering three mutual funds. The first is a stock f

Question

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 sure rate of 5.5%. The probability distributions of the risky funds are:

What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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 sure rate of 5.5%. The probability distributions of the risky funds are:

Explanation / Answer

Answer:

W1=(0.23)2-0.15*0.23*0.32/(0.32)2+(0.23)2-0.15*0.23*0.32

=0.0529-0.01104/0.1024+0.0529-0.01104

=0.04186/0.14426

=0.290

W2=(1-w1)

=(1-0.290)

0.71

E(rp)=W1*Return on stock fund+w2* return on bond fund

=0.290*0.15+0.71*0.09

=0.0435+0.0639

=10.74%

Standard deviation of the portfolio=Square root of [(0.290)2(0.32)2+(0.71)2*(0.23)2+2*(0.290*0.32*0.71*0.23*0.15)]

=Square root of[0.0841*0.1024+0.5041*0.0529+0.004545272]

=Square root of[(0.00861184+0.02666689+0.004546272]

=19.95%

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