A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 7%. The characteristics of the risky funds are as follows:
Expected Return Standard Deviation
Stock fund (S) 18 % 35 %
Bond fund (B) 15 20 The correlation between the fund returns is 0.12.
You require that your portfolio yield an expected return of 13%, and that it be efficient, that is, on the steepest feasible CAL.
a. What is the standard deviation of your portfolio? (Round your answer to 2 decimal places.)
Standard deviation : %
b. What is the proportion invested in the money market fund and each of the two risky funds? (Round your answers to 2 decimal places.)
Proportion invested
Money market fund %
Stocks %
Bonds %