1. Math
  2. Statistics And Probability
  3. 4 i8 pts suppose you have some money to invest...

Question: 4 i8 pts suppose you have some money to invest...

Question details

(4) I8 pts] Suppose you have some money to invest for simplicity, $1-and you are planning to put a fraction w into a stock market mutual fund and the rest, 1 -w, into a bond mutual fund. Suppose that $1 invested in a stock fund yields Rs after 1 year and that $1 invested in a bond fund yields Rh. Suppose further that Rs is random with with mean 0.08 (8%) and standard deviation 0.07, and that Rb is random with mean 0.05 (5%) and standard deviation 0.04. The correlation between Rs and Rb is 0.25. If you place a fraction w of your money in the stock fund and the rest, 1 - w, in the bond fund, then the return on your investment is RwRb (a) Suppose that w 0.5. Compute the mean and standard deviation of R. (b) Suppose that w-0.75. Compute the mean and standard deviation of R (c) What value of w makes the mean of R as large as possible? What is the standard deviation of R for this value of w? (d) What is the value of w that minimizes the standard deviation of R?

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution