Question

A pension fund manager is considering three mutual funds for investment. The first one is a stock fund, the second is a bond fund and the third is a money market fund. The money market fund yields a risk-free return of 4%. The inputs for the risky funds are given. Stock fund expected return = 10%, standard deviation =15%. Bond fund expected return =8% and standard deviation =12.5% The correlation coefficient between the stock and the bond funds is 0.20. a. what is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the bond fund. b. What is the expected return and the variance for a portfolio that invests 60% in the stock fund and 40% in the money market. (the correlation coefficient between the portfolio and the money market fund is zero. c. compare the portfolios in parts a and b with a portfolio that is invested entirely in the bond fund. Discuss the choices of a risk neutral and a risk averse person.

          A pension fund manager is considering three mutual funds for
investment. The first one is a stock fund, the second is a bond
fund and the third is a money market fund. The money market fund
yields a risk-free return of 4%. The inputs for the risky funds are
given. Stock fund expected return = 10%, standard deviation =15%.
Bond fund expected return =8% and standard deviation =12.5% The
correlation coefficient between the stock and the bond funds is
0.20. 
a. what is the expected return and the variance for a portfolio
that invests 60% in the stock fund and 40% in the bond
fund. 
b. What is the expected return and the variance for a portfolio
that invests 60% in the stock fund and 40% in the money market.
(the correlation coefficient between the portfolio and the money
market fund is zero.
c. compare the portfolios in parts a and b with a portfolio that
is invested entirely in the bond fund. Discuss the choices of a
risk neutral and a risk averse person.

Added by Julio H.

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