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1- Consider the following capital market: a risk-free asset yielding 3.00% per year and a mutual fund consisting

of 75% stocks and 25% bonds. The expected return on stocks is 13.95% per year and the expected return on bonds is 4.50% per year. The standard deviation of stock returns is 42.00% and the standard deviation of bond returns 18.00%. The stock, bond and risk-free returns are all uncorrelated. What is the expected return on the mutual fund? Enter your answer rounded to two decimal places.

2- Using the data from problem 1, what is the standard deviation of returns for the mutual fund? Enter your answer rounded to two decimal places.

3- Using the data from problem 1, now, assume the correlation between stock and bond returns is 0.36 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero). What is the standard deviation of returns for the mutual fund with this new higher correlation?

Top Answer

Expected return on the mutual fund = 11.58% Standard deviation... View the full answer

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