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1-A pension fund manager is considering three mutual funds. Thefirst is a stock fund, the second is a long-term government andcorporate bond fund, and the third is a T-bill money market fundthat yields a sure rate of 4.3%. The probability distributions ofthe risky funds are:

    

	Expected Return	Standard Deviation
Stock fund (S)	13%	34%
Bond fund (B)	6%	27%

    

The correlation between the fund returns is .0630.

    

What is the reward-to-volatility ratio of the best feasible CAL?(Do not round intermediate calculations. Round your answerto 4 decimal places.)

    

Reward-to-volatility ratio

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2-A pension fund manager is considering three mutual funds. Thefirst is a stock fund, the second is a long-term government andcorporate bond fund, and the third is a T-bill money market fundthat yields a sure rate of 4.1%. The probability distributions ofthe risky funds are:

   

	Expected Return		Standard Deviation
Stock fund (S)	11	%	33	%
Bond fund (B)	8	%	25	%

   

The correlation between the fund returns is .1560.

Suppose now that your portfolio must yield an expected return of9% and be efficient, that is, on the best feasible CAL.

  

a.	What is the standard deviation of your portfolio? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)

   

Standard deviation

%

    

b-1.	What is the proportion invested in the T-bill fund? (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)

   

Proportion invested in the T-bill fund

%

   

b-2.	What is the proportion invested in each of the two risky funds?(Do not round intermediate calculations. Round your answersto 2 decimal places.)

	Proportion Invested
Stocks	%
Bonds	%

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3-Suppose that many stocks are traded in the market and that itis possible to borrow at the risk-free rate,rƒ. The characteristics of two of thestocks are as follows:

Stock	Expected Return			Standard Deviation
A		8	%		40	%
B		12	%		60	%
Correlation = –1

a.	Calculate the expected rate of return on this risk-freeportfolio? (Hint: Can a particular stock portfolio besubstituted for the risk-free asset?) (Round your answer to2 decimal places.)

Rate of return

%

b.	Could the equilibrium rƒ be greaterthan 9.60%?
	Yes No