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 rate of 6%. The probability distribution of the risky funds is as follows:

	Expected Return			Standard Deviation
Stock fund (S)		16	%		35	%
Bond fund (B)		12			15

The correlation between the fund returns is 0.13.

What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

SHARPE Ratio=

Answer 1

Sharpe Ratio basically tells us how much excess return we are going to get for unit change in the amou9nt of risk taken for the same.

Given, for stock fund, Os = 35 %. L E(R) = 16 % for Bond fund, To = 15% T E (R) : 12". Since, only there a will be in the portfolio, we assume both are equally weighted ... - Ws = Wa=0.50 So, Expected netwen of poret folid rep = WE(s) + WgE CRO) Expected standard oleviation Tp = ws? ² + went + aws WB BTS TB = 19.91% na Sharpe Ratio - Pp-RE - 14% -6% p 19.01% = 0.402)