Bond returns is consistent with this portfolio standard

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Reference no: EM1314910

Q. Capital Allocation

Consider the subsequent capital market: a risk-free asset yielding 1.50percent (%) per yr also a mutual fund consisting of 55percent (%) stocks also 45percent (%) bonds. The expected return on stocks is 9.00percent (%) per yr also the expected return on bonds is 2.50percent (%) per yr. The standard deviation of stock returns is 23.00percent (%) also the standard deviation of bond returns 8.00percent (%). The stock, bond also risk-free returns are all uncorrelated.

1. Illustrate what is the expected return on the mutual fund?

2. Illustrate what is the standard deviation of returns for the mutual fund?

Now, assume the correlation between stock also bond returns is 0.70 also the correlations between stock also risk-free returns also between the bond also risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero).

3. Illustrate what is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why?
Now, assume which the standard deviation of the mutual fund portfolio is exactly 11.00percent (%) per yr also a potential customer has a risk-aversion coefficient of 2.0.

4. Illustrate what correlation between the stocks also bond returns is consistent with this portfolio standard deviation?

5. Illustrate what is the optimal allocation to the risky mutual fund (the fund with exactly 11.00percent (%) standard deviation) for this

investor?
6. Illustrate what is the expected return on the complete portfolio?

7. Illustrate what is the standard deviation of the complete portfolio?

8. Illustrate what is the Sharpe ratio of the complete portfolio?

Reference no: EM1314910

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