Assignment:
A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given below.
| Fund |
Expected Return |
Standard Deviation |
| Stock Fund |
14% |
26% |
| Bond Fund |
8% |
14% |
The correlation coefficient between the stock and bond funds is 0.20.
a. What is the expected return and the variance o f a portfolio that invests 60% in the stock fund and 40% in the bond fund?
b. What is the expected return and the variance of a portfolio that invests 60% in the stock fund and 40% in the money market fund?
c. Compare the portfolios in parts a and b with a portfolio that is invested entirely in the bond fund.
Provide complete and step by step solution for the question and show calculations and use formulas.