Question

Week 3 CH7 6 Saved Help Save & Exit 2 Check m Problem 7-8 25 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 T-bill money market fund that yields a rate or 7%. The probabity distribution of ne nsey funds is as follows: Expected Standard Deviation stoek fund (S) Bond fund (8) 15 20 The correlation between the fund returns is 012 What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter Print your answers as decimals rounded References to 4 places.) Sharpe ratio

Answer 1

Step 1: Calculate the covariance as follows 0.12 x 0.35 x 0.20 = 0.0084 Step 2: Calculate the weight of stock and bond invested as follows: (18%-7%)× (20% )2-(15%-7%)× 0.0084 [18%-790] x( 20%)' +[15%-7%]×(35%). [18%-7% +15%-7%]× 0.0084 0.00440-0.000672 0.004400.0098-0.001596 0.003728 0.012604 = 0.295779 or 29.58% = 1-29.5890 0.7042 or 70.42%