(13 marks)Assume that you currently have 40% of your wealth in a risk-free asset and 60% in the two mutual funds as shown below, which you may assume are efficiently and correctly priced:

Fund Expected Return on Stock (%) Beta of Fund % of Wealth Invested in Fund

A 7.8 0.80 25

B 10.8 1.20 35

Required: (be sure to show your work)

(a)Using the CAPM, and assuming the market is in equilibrium, calculate the risk-free rate and the expected return on the market portfolio.(4 marks)

Notwithstanding your answers in part (a), use rf= 2% and E(rM) = 10% for parts (b) through (d).

(b)Calculate the expected return on your portfolio.(3 marks)

(c)Calculate the beta of your portfolio(3 marks)

(d)You want to invest in only the risk-free asset and the market portfolio. You want an expected rate of return of 7%. How would you allocate your wealth between the risk-free asset and the market portfolio?(3 marks)