Question

2. 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 rate of 8%. The probability distribution of the risky funds is as follows: Fund Stock fund (S) Bond fund (B) Expected Return 20% 12% Standard Deviation 30% 15% The correlation between the fund returns is 0.10. a) Tabulate the investment opportunity set of the two risky funds: Expected Return Standard Deviation Proportion in Stock Fund 0% 20% 40% 60% 80% 100% Proportion in Bond Fund 100% 80% 60% 40% 20% 0% b) Using the table you computed in part a), what are the investment proportions in the minimum- variance portfolio of the two risky funds? c) What is the expected value and standard deviation of the minimum variance portfolio rate of return?

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Answer 1

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© v 1x : ENG 04:38 25-03-2020 * 27 X LF284 KW KX K Y KZ LA LB LC LD L E LE LG LH LI LK LIA 263 264 266 267 R(S) = R(B) = 20% 12% SD(S) = SD(B) = 30% 15% STOCK FUND AND BOND FUND 268 269 270 a 271 272 273 274 275 276 277 278 PORTFOLIO WEIGHTS PORTFOLIO RETURN W(S) W(B) W(S) *R(S) + W(B)*R(B) 0% 100% 12.00% (0%20% + 100%*12%] 20% 80% 13.60% [20%20% + 80% 12%] 40% 60% 15.20% AND SO ON 60% 40% 16.80% 80% 20% 18.40% 100% 0% 20.00% PORTFOLIO SD SQRT (W(S))^2*(SD(S))^2 + (W(B)^2*(SD(B)^2 + 2 W(S)*W(B)* (SD(S))*(SD(B))*(r )) 15.00% (SORT((0%)^2* (30%)^2 + (100%)^2* (15%)^2 + 2*0%*100%*30%*15%*0.1)] 13.94% (SQRT(20%)^2* (30%)^2 + (80%)^2* (15%)^2 + 2*20%*80%*30% 15%*0.1)] 15.70% 19.53% 24.48% 30.00% 279 MINIMUM VARIANCE PORTFOLIO AT W(S) =20% AND W(B) =80% 280 b 281 282 283 EXPECTED RETURN = STANDARD DEVIATION = 13.60% 13.94% 284 285 286 capm-portfolio retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV RAK ROE std costing EPS%, ECONOMY ... |