Mike and Jennifer Martin are both 50 years old, have no children, and reside in Sydney, Australia. Mike's father, Liam Martin, passed away lately and gave Mike his whole wealth. Mike anticipates receiving his inheritance of 9 million Australian dollars (AUD) after taxes in one year. The Martins want to retire at that time, and you are meeting with them to develop an investment strategy.

The Martins now possess a property valued at AUD 3.9 million, however, they do not have a portfolio of investable assets and do not consider their home to be an investable asset. In one year, the Martins will owe AUD 3.7 million (house mortgage) and AUD 160,000 (other debt) (other debts). After receiving the bequest, the Martins will pay off all of their obligations.

The Martins have a combined after-tax income of AUD500,000, yearly living costs of AUD263,000, and annual principal and interest mortgage payments of AUD237,000. Mike's company will begin paying him a post-tax pension of AUD 51,000 when he retires in one year. His company will continue to cover the Martins' medical expenses till their death. If Mike passes away before Jennifer, she will continue to get both the pension and health benefits. The Martins anticipate that their living expenses will increase at the rate of inflation until one of them passes away. At that time, they anticipate that the survivor's living expenditures will reduce to 75% of their combined spending and then continue to increase at the yearly inflation rate of 3%.

The Martins aim to finance their retirement expenditures using Mike's pension and the investment income produced by the inherited assets. The Martins perceive their investment base to be substantial due to the bequest, want a conservatively managed portfolio, and wish to preserve the actual worth of their investable assets over time. They want to donate any remaining assets to charity. In Australia, all income and realized capital gains are taxed at a rate of 25%. Their tax bracket is twenty percent.

(1). Calculate the required return for the Martin’s portfolio. Do not assume any tax effects related to the mortgage. You must show your calculations in order to get point.

(2). Discuss the level of the Martins’ risk (including both their willingness and ability to take the risk, as well as the overall risk level). Justify each with at least two reasons.