There are three mutual funds-a stock fund, a long-term bond fund, and a T-bill money market fund that yields a risk-free rate of 3.2% per year.
E(R stock)=11.45%
E(R bond)=7.08%
Standerd deviation (stock)= 16.71%
Standerd deviation (bond)= 16.71%
correlation coefficient for stock and bond funds=0.42%
rf=3.2%
1) Suppose your portfolio can only include T-bill and stock fund, expected return of the portfolio is 10%, what is the proportion invested in the stock fund? Sharpe ratio of your portfolio?
2) You can only use stock and bond to build a portfolio that has an expected return of 10%. What is the proportion invested in the bond fund? What is the Sharpe ratio of your portfolio? Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of 0% to 100% in increments of 10%. What expected return and standard deviation does your graph show for the minimum-variance portfolio?
3) You can use all the 3 funds to build a portfolio. Expected return of the portfolio is also 10%. What is the proportion invested in the each of the 3 funds?