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:
E(r) σ
Stock Fund (S) 20% 30%
Bond Fund (B) 12% 15%
The correlation between the funds is 0.10.
*What are the investment proportions in the minimum-variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return?
*Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio
*The market index has a standard deviation of 22% and the risk-free rate is 8%.
The following are estimates for two stocks:
Firm-Specific
Standard Deviation = σ(εi)
Stock E(r) β
A 13% 0.8 30%
B 18% 1.2 40%
(a) What are the standard deviations of stocks A and B?
(b) Suppose that were to construct a portfolio with proportions:
Stock A: .30
Stock B: .45
T-bills: .25
Compute the expected return, standard deviation, beta , and nonsystematic standard deviation of the portfolio.
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A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a...
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