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An investor is considering investing $100,000 in three mutual funds. The firstis a stock fund, the second is a long-term government and corporate bond fund, and the thirdis a T-bill money market fund that yields a risk-free rate of 5 percent. Returns on the stockfund and the bond fund have a correlation coefficient of 0.1 and the following characteristics:
Expected Return Standard deviation
Stock fund: 17 % 20%
Bond fund : 9% 12%
A: When picking the optimal risky-portfolio, how much will the investor invest in each ofthe risky mutual funds?
B: What is the expected value, standard deviation and the Sharpe ratio of the optimalrisky portfolio?
C: If the investor has a standard utility function over returns and has a risk aversioncoefficient of 3, how much will the investor invest in the risk-free mutual fund?
D: What is the expected value, standard deviation and the Sharpe ratio of the optimalportfolio?
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