Portfolio Management Q56

56Arman is considering investing in a small-cap stock fund and a general bond fund. The correlation between the two fund returns is 0.12. Expected annual return equaled 16% and 6% respectively with standard deviation of 30% for small-cap stock and 11.5% for general bond fund. If Arman requires a portfolio return of 10 percent, the proportions in each fund respectively should be closest to:

Option : C
Explanation : 10% = w¡* 16 % + (1 – w¡)* 6%; w¡ = 40%, (1 – w¡) = 60%.
Thus, 40 percent should be invested in the small-cap fund and 60 percent should be invested in the bond fund.

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