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 longterm corporate bond fund, and the third is a T-bill money market fund that yields a guaranteed rate of 5.5%. The probability distribution of the risky funds are Fund Expected Return Standard Deviation Stock Fund 15% 32% Bond Fund 9% 23% Assume that the correlation between the fund returns is 0.15. (a) Complete the following table. Use the “Portfolio Weight Calculator” on CROPS. You do not need to show your work. [2 Points] WS = Portfolio Weight in Stock Fund WB = Portfolio Weight in Bond Fund Expected Return of Overall Portfolio Standard Deviation of Overall Portfolio 0 1 0.2 0.8 0.4 0.6 0.6 0.4 0.8 0.2 1 0 (b) Calculate the optimal risky portfolio. What fraction of funds in the optimal risky portfolio is in the stock fund? What fraction of funds in the optimal risky portfolio is in the bond fund? [8 Points]

Explanation / Answer

The graph approx the points:

E(r) Standard Deviation
Minimum Variance Portfolio 10.89% 19.94%
Targency Portfolio 13.25% 24.57%

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