Business, 28.03.2020 03:59 mely2668

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.0%. The probability distributions of the risky funds are: (Total 20 points) Expected Return of Market Standard Deviation Stock funds (S) 15% 32% Bond funds (B) 9% 23% The correlation between the fund returns is 0.15.

a. Use the formula below to compute the optimal portfolio weights.

B. You manage $2000 for your client and your client wants an expected return of 10%. Using the optimal weights you got from part a, how much money do you invest in each of the three funds? (10 points) Hint: you need to compute the risky portfolio return using optimal weights from part a first.

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