Question:

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 Tbill money market fund that yields a sure rate of 5.5%. The probability distributions of
the risky funds are:
Expected Return

Standard Deviation

Stock Funds (S)

15%

32%

Bond Fund (B)

23

The Correlation between the fund return is 15.

8. Tabulated and draw the investment opportunity set of the two risky funds. Use
investment proportions for the stock fund of 0to 100% in increments of 20%. What
expected return and standard deviation does your graphs show for the minimum
Variance portfolio?
Answer:
Expected Returns:
E(Rp) = Ewi E(Ri)
E(Rp) = 0.10*0.150+0.2*0.900
0.015+0.18 = 0.195 = 19.5%
Standard Deviation:
S.D = square of[ (0.1)*(0.32)+(0.2)*(0.23)]+ 2(0.1)(0.2)(0.15)(0.32)(0.23)
= 0.1*0.102+0.04*0.052+2(0.00022)
= .00344= squared of 0.059= 5.9%

Efficient Frontier (CAL)

20.0%
15.0%
10.0%

Efficient Frontier
(CAL)

5.0%
0.0%
0.0%

Proportion
in "Your"
Fund (w)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%

5.0%

10.0%

Proportion
in other
asset (1-w)
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%

E(rp)
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%

15.0%

SD(rp)
23.0%
21.2%
19.5%
17.9%
16.6%
15.5%
14.7%
14.3%
14.3%
14.6%
15.4%
16.3%
17.1%

20.0%

25.0%