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 rate of 8%. The probability distribution of the risky funds is as follows:
Stock fund (S): Expected Return= 20%; Standard Deviation= 30%
Bond fund (B): Expected Return= 12; Standard Deviation= 15
The correlation between the fund returns is 0.10
You require that your portfolio yield an expected return of 14%, and that it be efficient, on the best feasible CAL.
What is the standard deviation of your porfolio?
What is the proportion invested in the T-bill fund and each of the two risky funds?
T-bill fund: Proportion invested?
Stocks: Porportion invested?
Bonds: Proportions invested?