Question

Suppose Intel stock has a beta of 0.89​, whereas Boeing stock has a beta of 1.21. If the​ risk-free interest rate is 5.1% and the expected return of the market portfolio is 13.4%​, according to the​ CAPM,

a. What is the expected return of Intel​ stock?

b. What is the expected return of Boeing​ stock?

c. What is the beta of a portfolio that consists of 70% Intel stock and 30% Boeing​ stock?

d. What is the expected return of a portfolio that consists of 70% Intel stock and 30% Boeing​ stock?

A. answer for part a = 11.1%; answer for part b = 13.3%; answer for part c = 0.88; answer for part d = 12.6%

B. answer for part a = 11.6%; answer for part b = 13.8%; answer for part c = 0.86; answer for part d = 13.1%

C.  answer for part a = 12.5%; answer for part b = 15.1%; answer for part c = 0.98; answer for part d = 13.2%

D.  answer for part a = 12.6%; answer for part b = 15.3%; answer for part c = 0.99; answer for part d = 13.4%

Answer 1

Expected return as per CAPM = Risk free rate + beta*(Expected Return on market – risk free rate)

Intel = 5.1% + 0.89*(13.4%-5.1%)

= 12.487%

i.e. 12.5%

Boeing = 5.1% + 1.21*8.3%

= 15.143%

i.e. 15.1%

Portfolio beta = weighted average beta

= 0.89*70% + 1.21*30%

= 0.986

Portfolio return = Weighted average return

= 12.5%*70% + 15.1%*30%

= 13.28%

Hence, the answer is

C.  answer for part a = 12.5%; answer for part b = 15.1%; answer for part c = 0.98; answer for part d = 13.2%