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 5.7%. The probability distributions of the risky funds are:

   

   

   

What is the reward-to-volatility ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

   

Expected Return Standard Deviation    Stock fund (S) 18%         47%             Bond fund (B) 7%         41%         

Explanation / Answer

Reward to volatility = (Mean portfolio return Risk-free rate)/Standard deviation of portfolio return

Stock fund = (18 - 5.7) / 47

= .2617

Bond fund = (7 - 5.7) / 41

= 0.0317

Reward to volatility of the Best feasible CAL = Stock fund = 0.2617

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