Question

8. A pension fund manager is considering three mutual funds, a stock fund with expected return of 15% and standard deviation of 32%, a bond fund with expected return of 9% and standard deviation of 23%, and a money market fund with a sure rate of 5.5%. The correlation between the stock and bond funds is 0.15. Tabulate and draw the investment opportunity set of the two risky funds, using investment proportions for the stock fund from 0% to 100% in increments of 20%. What is the lowest-risk combination of the stock and bond funds

Answer 1

Answer:

The lowest risk combination is at : expected return = 12%

                                                         standard deviation = 17.44%

Explanation:

Three mutual funds

stock fund : 15% expected return,  23% standard deviation

Bond fund : 9% expected return , 23% standard deviation

money market : sure rate of 5.5%

correlation between stock and bond fund = 0.15

variance for stock fund = 0.5 ( solved using excel )

variance for bond fund = 1 - variance for stock = 1 - 0.5 = 0.500

attached below is the table and