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Finance: Mutual Funds.

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Capital Allocation

Consider the following capital market: a risk-free asset yielding 3.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 12.00% per year and the expected return on bonds is 5.50% per year. The standard deviation of stock returns is 30.00% and the standard deviation of bond returns 19.00%. The stock, bond and risk-free returns are all uncorrelated.

1. What is the expected return on the mutual fund?
2. What is the standard deviation of returns for the mutual fund?

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Solution Summary

The problem set deals with estimating the performance statistics of a portfolio of bonds and risk-free asset.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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