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 5.8%. 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.)

  

I got the expected return with 0.12683 which is wrong.

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 5.8%. The probability distributions of the risky funds are:

Explanation / Answer

Expected Return

No ratio has been given,hence we assume equal weight for all the 3 securities, Hence Weightage will be 1/3 that is 0.333333 for each security.

Hence Expected Return of Portfolo will be 11.267%

Standard Deviation

Since Standard deviation of Treasury is 0, we shall take only stock fund and bond fund for calculating portfoli standard deviation.

Portfolio Variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(RA, RB)

Portfolio Variance= (0.333)2*(48*48) + (0.333)2*(42*42) + 2*(0.333)*(0.333)*(0.762) = 451.2654

Standard Deviation= (451.2654)^1/2

=21.243%

Partculars Expected Return Weight Expected Return *weight T Bill 5.80% 0.33 1.933% Stock Fund 19% 0.33 6.333% Bond Fund 9% 0.33 3.000% Total 11.267%

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