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Unformatted text preview: term corporate bond fund. The market statistics on these two funds are as follows: Expected Return Standard Deviation Stock fund 0.25 0.40 Bond fund 0.10 0.20 Correlation between the fund returns is 0.3 (a) Suppose you are an investor who is extremely risk averse and would like to avoid as much risk as possible. Derive explicitly your investment portfolio based on the information given above, assuming an initial investment amount of $1,000. 4 (Question 3 Cont’d) (b) In addition to the above market information, suppose now the economy exists a Tbill which is a riskfree asset with return 5%. Determine, by using an appropriate optimization, the optimum rewardtovariability ratio of the best feasible Capital Allocation Line? 5 4. [4 marks] The eﬃcient market hypothesis implies that all mutual funds should obtain the same expected riskadjusted returns. Therefore we can simply pick mutual funds at random. Is this statement true or false? Explain....
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 Winter '09
 MARYHARDY
 CIBC

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