The following data apply to Problems 4 through 10: 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 rate of 8%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is .10.

Ex.4. Summary:
E (r S ¿ = 20%; σ S = 30%
E (r B ¿ = 12%; σ B = 15%
ρ = 0,1; r f = 8%
From the standard deviations and the correlation coefficient we generate the
covariance matrix:
WB WS WB WS
2
WB σ B
ρ σ B σS WB 0,0225 0,0045
2
WS ρσ B σ S σ S WS 0,0045 0,09

The minimum-variance portfolio is computed as follows:

 2
σ S− ρσ B σ S 0 , 09−0,0045
w
min
B = 2 2
σ + σ −2 ρ σ B σ S
= 0,0225+0 , 09−2.0,0045 = 0,8261
B S

min min
w S = 1 - w B = 1 - 0,8261 = 0,1739

The expected rate of return on a minimum-variance portfolio:

E(r)min = (0,8261.0,12) + (0,1739.0,2) = 0,1339 = 13,39%
The standard deviation of the return on a minimum-variance portfolio:
σmin = √ w 2S . σ 2S + w2B . σ 2B +2 w B w S ρ σ B σ S

= √ 0,17392 .0 ,09+ 0,82612 . 0,0225+2 . 0,8261 .0,1739 .0,0045

= 0,1392 = 13,92%

Ex.6. The above graph in Exercise 5 indicates that the optimal portfolio is the tangency
portfolio with expected return approximately 15.6% and standard deviation
approximately 16.5%.
Ex.8.
The reward-to-volatility ratio of the optimal CAL is:
E ( r p )−r f 0,1561−0 , 08
S= = 0,1654
= 0,4601
σp

Ex.10.
Using only the stock and bond funds to achieve a portfolio expected return of 14%, we
must find the appropriate proportion in the stock fund (wS) and the appropriate proportion
in the bond fund (wB = 1 − wS) as follows:
0,14 = 0,2. wS + 0,12 × (1 − wS) = 0,12 + 0,08. wS  wS = 0,25
So the proportions are 25% invested in the stock fund and 75% in the bond fund. The
standard deviation of this portfolio will be:

= √ w S . σ S + w B . σ B +2 w B w S ρ σ B σ S
2 2 2 2
σP
= √ 0 , 252 . 0 , 09+0 , 752 . 0,0225+2. 0 ,25 .0 , 75 .0,0045
= 0,1413 = 14,13%
This is considerably greater than the standard deviation of 13.04% achieved using T-bills
and the optimal portfolio.
CFA.4. The portfolio that cannot lie on the efficient frontier, as described by Markowitz,
is Portfolio Y. It has a higher expected return than Portfolio X, but it also has a higher
standard deviation, indicating higher risk. The efficient frontier typically includes
portfolios that offer the highest expected return for a given level of risk. Since Portfolio Y
has higher risk (standard deviation) than Portfolio X but not a significantly higher
expected return, it may not be part of the efficient frontier.
CFA.6. The measure of risk for a security held in a diversified portfolio is Covariance. 
Choose D.
CFA.8. Since the covariance between Miller and Mac Corp is negative (-0.05), these two
stocks tend to move in opposite directions more often than not. When one goes up, the
other is likely to go down, and vice versa. This negative covariance has a diversification
benefit, reducing overall portfolio risk. By adding Mac Corp to her portfolio, the investor
benefits from diversification, which reduces the overall risk more effectively. So, choose
A. (Này giải thích cho hiểu thôi, viết như dưới cho nhanh =)))
Choose A: Decline more when the investor buys Mac.
CFA.10. Since we do not have any information about expected return, we focus
exclusively on reducing variability. Stocks A and C have equal standard deviations, but
the correlation of Stock B with Stock C (0,10) is less than that of Stock A with Stock B
(0,9). Therefore, a portfolio comprised of Stocks B and C will have lower total risk than a
portfolio comprised of Stocks A and B.