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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 5.4%. the probability distributions of the risky funds are: expected return standard deviation stock fund (s) 15 % 44 % bond fund (b) 8 % 38 % the correlation between the fund returns is .0684. suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible cal.

a. what is the standard deviation of your portfolio? (do not round intermediate calculations. round your answer to 2 decimal places.)

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Final answer:

The calculation for the standard deviation of the portfolio with an expected return of 13% cannot be provided without additional information on the weights of the assets. However, it is understood that higher returns typically come with higher risks, and the efficient allocation of assets in a portfolio depends on striking a balance between these two factors.

Step-by-step explanation:

The student is asking about portfolio optimization, which involves selecting the best combination of assets that achieves the highest expected return for a given level of risk. In this case, the portfolio must yield an expected return of 13% and have the lowest possible risk, meaning it should lie on the efficient frontier. To calculate the standard deviation of such a portfolio, one would typically use the formula that considers the weights of the assets in the portfolio, the standard deviations of the individual assets, and the correlation between their returns. However, since we don't have the weights of the assets, we cannot compute the exact standard deviation without additional information.

It's essential to note that higher returns are usually associated with higher risks. Over time, stocks have provided higher returns than bonds, but with greater volatility. Conversely, bonds offer lower returns but with lower volatility compared to stocks. Savings accounts yield the lowest returns but have virtually no volatility. Understanding the trade-off between risk and return is critical for efficient portfolio management and wealth accumulation.

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