Patty and Gerry have recently wed and are combining their investment savings. Patty has $4800 invested in Fund A that their advisor tells them has a beta of 0.85 and an expect return of 7.1%. Gerry has $7200 invested in Fund B which has a beta of 1.15 and an expected return of 8.9%, according to their advisor. Additionally, Patty and Gerry have a combined $8000 invested in money market securities that are expected to earn the risk-free return, which we will assume is 1% for parts (a) and (b) only.

Required:

(a) Calculate the expected return on Patty and Gerrys portfolio. (3 marks)

(b) What is the beta of Patty and Gerrys portfolio? (3 marks)

(c) When Patty and Gerry asked how the expected returns for the two funds were determined, the advisor responded that she used the CAPM. Determine the risk-free rate and the market risk premium used by the advisor. (4 marks)

Notwithstanding your answers in part (c), use r_f = 2.5% and MRP = 5.0% for part (d).

(d) You want to invest in only the risk-free asset and the market portfolio. You want an expected rate of return of 4.5%. How would you allocate your wealth between the risk-free asset and the market portfolio?

PLEASE SHOW THE EXCEL WORKINGS