b. Adrian has worked for a private company for a few years after graduating from university. He has accumulated $300,000 savings for investment and plans to include the following 4 assets in his investment portfolio,

Expected Return Beta

Equity Fund 15% 2.50

Market Portfolio ETF 10% 1.40

Corporate Bond Fund 4% 0.60

Risk-Free Asset 2% 0.00

(i) Do the data in the table provide any clue if the capital market is in equilibrium or not. Explain. (Hint: Examine the reward-to-risk ratios of the funds) (10 marks)

(ii) Explain if the manager of the Market Portfolio ETF does his job well. (6 marks)

(iii) Assume Adrian wants his portfolio to have the same risk as market portfolio (not Market Portfolio ETF!). He plans to invest $50,000 and $70,000 in the Equity Fund and Market Portfolio ETF respectively. How much should he invest in the Corporate Bond Fund and risk-free asset such that he can accomplish his objective? What is the expected return of this portfolio? (13 marks)

(iv) One year has passed and the value of Adrians portfolio reaches $315,000. He is not satisfied with the return and plans to boost it by raising the portfolio beta to 2. He will also divest the Corporate Bond Fund and risk-free asset and allocate the proceeds to the remaining funds. How much of each fund should Adrian hold? What is the expected return of the new portfolio? (8 marks)