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# 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

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 rate of 5%. The probability distribution of the risky funds is as follows:

 Expected Return Standard Deviation Stock fund (S) 19% 32% Bond fund (B) 12 15
 The correlation between the fund returns is 0.11.

 What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)
 Sharpe ratio_______

B.) Greta, an elderly investor, has a degree of risk aversion of A = 5 when applied to return on wealth over a 3-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 3-year strategies. (All rates are annual, continuously compounded.) The S&P 500 risk premium is estimated at 5% per year, with a SD of 20%. The hedge fund risk premium is estimated at 12% with a SD of 40%. The return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta believes this is far from certain.

 b-1. Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)
 S&P______ Hedge_______
 b-2. What is the expected return on the portfolio? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)
 Expected return_________
 b-3. What should be GretaAc€?cs capital allocation? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.
 S&P______ Hedge_______ Risk-free asset

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May 20 2020 View more View Less