A pension fund manager is considering three mutual funds. The first is a stock f
ID: 2713979 • Letter: A
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:
Suppose now that your portfolio must yield an expected return of 17% and be efficient, that is, on the best feasible CAL.
What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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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 sure rate of 5.8%. The probability distributions of the risky funds are:
Explanation / Answer
Answer:
W1=(0.42)2-0.0762*0.42*0.48/(0.48)2+(0.42)2-0.0762*0.48*0.42
=0.1764-0.01536192/0.2304+0.1764-0.01536192
=0.16103808/0.39143808
=0.411
W2=(1-w1)
=(1-0.411)
=0.589
Standard deviation of the portfolio=Square root of [(0.411)2(0.48)2+(0.589)2*(0.42)2+2*(0.411*0.48*0.589*0.42*0.0762)]
=Square root of[0.168921*0.2304+0.346921*0.1764+0.00743759646]
=Square root of[(0.0389193984+0.0611968644+0.00743759646]
=3.28%
Answer:b-1 E(rp) = 0.411*19 + 0.589*9
=7.809+5.301
=13.11%
Answer:b-2
13.11% = 5.8%*w + 13.11%*(1-w)
w: weight in the risk free asset = 0.42
the rest in stock and bond funds.
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