What is the standard deviation of the complete portfolio

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Reference no: EM13153820

Capital Allocation:

Consider the following capital market: a risk-free asset yielding 1.75% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 12.50% per year and the expected return on bonds is 3.25% per year. The standard deviation of stock returns is 29.00% and the standard deviation of bond returns 8.75%. The stock, bond and risk-free returns are all uncorrelated.

Now, assume that the standard deviation of the mutual fund portfolio is exactly 18.00% per year and a potential customer has a risk-aversion coefficient of 2.75.

4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation?

5. What is the optimal allocation to the risky mutual fund (the fund with exactly 18.00% standard deviation) for this investor?

6. What is the expected return on the complete portfolio?

7. What is the standard deviation of the complete portfolio?

8. What is the Sharpe ratio of the complete portfolio?

Reference no: EM13153820

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