A pension fund manager i mutual funds. This 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 9%. The probability distribution of the risky funds is as follows: Expected return Standard deviation Stock fund (S) 20% 30% Bond fund (B) 12% 15% The correlation between the fund returns is 0.10.
1. What are the investment proportions in the minimum variance portfolio of the two risky
funds, what is the expected value and standard deviation of its rate of return?
2. What is the reward-to-variability ratio of the best feasible CAL?
3. Suppose now that your portfolio must yield an expected return of 14% and be efficient, that
is, on the best feasible CAL.