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 t-bill money market fund that yields a sure rate of 5.5%. the probability distributions of the risky funds are:

Answer 1

The probability computed about the pension fund manager indicates that the standard deviation of the portfolio is 21.93%

How to calculate probability?

From the complete information, the covariance between fund returns will be:

= 34% × 25% × 0.11

= 0.9350%

The weight of the bond fund is given as 0.407281. Therefore, the weight of the stock fund in portfolio will be:

= 1 - 0.407281

= 0.592719

Therefore, the standard deviation will be:

= 23.56% × 0.9309471

= 21.93%

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