Question

A pension fund manager is considering three mutual funds. The first is a stock fund, the second

Check my work a batte 1.ba VE points 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 Tobili money market fund that yields a sure rate of 40 The probability distributions of the risky funds are: Eirs) = 10% 6s=327 Expected Return Standard Deviation Elrs=7% 616:24% Stock fund (S) 104 Bond fund (8) 24% P = 0.1250 The correlation between the fund returns is 0.1250. lov S.B) ECSB LES ECB DE eBook Prine References What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.) - 0.1250 Lovis, B) = 8x 6s xa Expected return Standard deviation % 288 TEIRs) -rf I bin - LEIRB) -rf 1 X LOVIS, B) 0.1250 x 32 x 24 Ws= [Elks ) -rf] 63 +[E(26)-rf] bs - [ElRs) of TE (RAB)

Answer 1

Answer 2)

Given:

Expected return(Bonds), E(B) = 7%

Expected return(Stocks), E(S) = 10%

Standard deviation of bonds, $\sigma$ (B) = 24%

Standard deviation of stocks, $\sigma$ (S) = 32%

$\rho$ , Correlation = 0.1250

	Return	SD	variance
S	10%	32%	0.1024
B	7%	24%	0.0576

Min Risk Portfolio is given by:

Wrin (s) = 6 6 - Cor (B, 5) +62 – 2 Cor (6,5)

also, Cov (B,S) = $\rho$ * $\sigma$(S) *$\sigma$(B)

Putting in values,

Wmin(S) = [ (0.24)^² - ( 0.1250 * 0.24 * 0.32) ] / [ (0.32)^2 + (0.24)^2 - 2 * ( 0.1250 * 0.24 * 0.32) ]

Wmin(S) = 0.048 / 0.1408

Wmin(S) = 34.09%

Hence,

Wmin (B) = 65.91%

Now,

Formula to be used

Reported quturom postfoto - We # Els & wet. E(B). Std. deviator of Portpales (se) = sqrt (62)

SUMIE X v fx =(E19*$F$8)+(F19*$F$9) E F Return SD 10% 7% variance 32% 0.1024 24% 0.0576 0.16 0.0192 Check fromula here 0.1408 0.0096 Ws min Wb min 34.09% 65.91% % in B Sta 18 19 % in (s) 34.09% Expected Return Variance 65.91% =( E19 * $F$8 )+(F19 * $F$9)

X SUMIE A v fx C B =(B19*$H$8)+(C19*$H$9) D E F Return SD S 10% B7% 24% variance 32% 0.1024) 0.0576) 0.16 0.0192 Check fromula here 0.1408 Correlation 0.125 0.0096 0.048 Ws min Wb min 34.09% 65.91% % in B SqS STB 0.116213] 0.43441281] % in (s) 34.09% Expected Return Variance Standard Deviation 8.02% =( B19 * $H$8 )+(C19 * $H$9) 65.91%

SUMIE A XV fx =SQRT(H19) C D B E E Return . SD S 10% 7% variance 32% 0.1024 24% 0.0576 0.16 0.0192 Check fromula here 0.1408 Correlation 0.125 0.0096 0.048 Ws min Wb min 34.09% 65.91% % in B SqS STB 0.116213 0.43441281 % in (s) 34.09% Expected Return 8.02% Variance Standard Deviation 0.03692237 =SQRT(H19) 65.91%

% in B % in (s) 34.09% Expected Return 8.02% Variance Standard Deviation 0.03692237 19.22% 65.91%