Standard deviation for optimal risky portfolio

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Reference no: EM131996294

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 sure rate of 5.5%.

The statistics from the probability distribution of the risky funds are:

Stock Fund(S) Bond Fund (B)

Expected Return 15% 9%

Standard Deviation 32% 23%

The correlation between the fund returns is 0.15. What is the expected return and standard deviation for the optimal risky portfolio? Hint: see formula 6.10, p. 162 for determination of weights. ( the answer is WB = 0.3534; WS = 0.6466; E(rp) = 12.88%; σp = 23.3377% ) Draw the CAL of this particular portfolio. Label the point for the optimal risky portfolio with the label O.

Reference no: EM131996294

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