Question 4: Tasman Co. has a beta of 0.9, and an expected return of 15%. Macquarie Co. has a beta of 1.2 and an expected return of 16%. Lucy plans to invest in both stocks.

(a) If risk-free rate is 2.5%, and Lucy are spreading her money equally on both stocks, what is the expected return on Lucys portfolio?

(b) If a portfolio of the two assets has a beta of 0.85, what are the portfolio weights?

(c) If Lucy include one more risk-free asset into her existing portfolio in part (b), and this new portfolio has a beta of 1.3. what are the portfolio weights? How do we interpret the weight for the risk-free asset?