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 expected return and standard deviation for the minimum-variance portfolio of the two risky funds?(Round your answers to 2 decimal places. Omit the "%" sign in your response.)

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

Correlation (S&B) =Covarriance/(St. Dev. of S* St. Dev. of B)

Covarriance = Correlation* (St. Dev. of S* St. Dev. of B)

= .15*(32*23) = 110.40

Varriance =Square of Standard Deviation

Varriance (S) = (32)^2 =1024

Varriance (B) = (23)^2 =529

Investment Proportion in (S)tock Fund = (Varriance of B -Covarriance)/(Varriance of S+Varriance of B-2Covariance)

=(529-110.40)/1332.20 =.31

Investment Proportion in (B)ond Fund= 1-.31 =0.69

Expected Return =4.65+6.21 =10.86%

Combined Standard Dev. =Underroot (32*.31)^2 + (23*.69)^2 + 2(32*.31) + (23*.69)*.15

   = Underroot397.49 =19.94

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