Problem:
A pension fund manger 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 sure return of 5.5%. The probability distributions of the risky funds are:
- Stock fund: Expected return = 15%
- Standard deviation = 31%
- Bond fund: Expected return = 9%
- Standard deviation = 23%
Required:
Question 1: If you were to use only the two risky funds and still require an expected return of 12%, what would be the investment proportion of your portfolio?
Question 2: What is the standard deviation of your portfolio?
Note: Show supporting computations in good form.