Problem 6-10 A pension fund manager is considering three mutual funds. The first
ID: 2713125 • Letter: P
Question
Problem 6-10
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 4.6%. The probability distributions of the risky funds are:
What is the reward-to-volatility ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.)
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 4.6%. The probability distributions of the risky funds are:
Explanation / Answer
Reward to Volatility Ratio=(Mean portfolio return Risk-free rate)/Standard deviation of portfolio return
Stock Fund=(.16-.046)/.36
=0.316666 or 31.6666%
Bond Fund=(.07-.046)/.36
=.066666 or 6.6666%