Suppose the portfolio of a large institutional investor ‘Ace’ has a beta of 1.5, and the standard deviation of the rate of return on its portfolio is 15 percent. The portfolio of another institutional investor ‘Yankee’ has a beta of 0.7. The market portfolio may be expressed as a portfolio comprising the portfolios of Ace and Yankee, and its Sharpe ratio is 0.8 Suppose there is a firm called ‘Rusty Steel’, whose stock’s beta is 2 and it can borrow at the risk-free rate, which is 2.5 percent. Rusty’s equity value is £1.5 million and its debt is £1 million. The present value of Rusty’s tax shield is £0.3 million. Assuming that both CAPM and the Modigliani-Miller theorem with corporate taxes hold, answer the following questions. 

a) What is the weight attached to Ace if we express the market portfolio as a portfolio comprising the portfolios of Ace and Yankee? [5 marks]

 b) What is the expected return on the market portfolio? [5 marks] 

c) What is the standard deviation of the rate of return on Yankee’s portfolio? [5 marks] d) What is the after-tax WACC of Rusty?