Question

Consider the following two assets. The first is a stock fund, the second is a long-term government and corporate bond fund. The probability distribution of the funds is as follows: Expected ret std. dev. Stock fund 18% 25% Bond fund 11% 18% The correlation between the fund returns is 0.4. What is the investment proportion in the minimum variance portfolio of the bond fund

Answer 1

0.76

Step-by-step explanation:

So, in this particular question we are given that that there are two assets which are the; [1]. stock fund and [2]. a long-term government and corporate bond fund.

From the question/problem, we have that the Expected ret and the std. dev. for the Stock fund is 18% and 25% respectively. Also, the Expected ret and std. dev. for Bond fund 11% and 18% respectively.

Thus, the investment proportion in the minimum variance portfolio of the bond fund = 1 - [ ( 18%)² - 0.4 × 25% × 18%) ÷ ( 25%)² + (18%)² - 2 × 0.4 × 25% × 18%. = 1 - [0.0144 ÷ 0.0609 ] = 1 - 0.24 = 0.76.