Question

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 sure rate of 47%. The probability distributions of the risky funds are: Expected Return Standard Deviation Stock fund 373 (5) Bond fund (8) 31% The correlation between the fund returns is 0.1065. 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.) Expected return Standard deviation

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

BC DE t-bills 4.70% Expected return Std. Deviation of return Correlation Stock fund 17.00% 37.00% 0.1065 Bond fund 8.00% 31.00% - amor.FM Minimum variance Portfolio (Stock fund + Bond fund) weight of stock fund weight of bond fund Expected return Std. deviation of return 0.4022 0.5978 11.62% 24.97%

Cell reference -

C23 в c I E Stock fund t-bills Expected return Std. Deviation of return Correlation 0.047 Bond fund 0.08 0.31 0.17 0.37 0.1065 Minimum variance Portfolio Stock fund + Bond fund) weight of stock fund weight of bond fund Expected return Std. deviation of return |=(D4^2-C5*C4*D4)/(C4^2+D4^2-2*C5*C4*D4) =1-08 =C8*C3+C9*D3 =SQRT{(C8*C4)^2+(C9*D4)^2+2*C8*C9*C4*D4*C5)

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