Question

Suppose Intel stock has a beta of 1.6, whereas Boeing stock has a beta of 1. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM,

1. What is the expected return of Intel stock?
2. What is the expected return of Boeing stock?
3. What is the beta of a portfolio that consists of 60% Intel stock and 40% Boeing stock?
4. What is the expected return of a portfolio that consists of 60% Intel stock and 40% Boeing stock? (Show both ways to solve this.)

Answer 1

a. Expected return = Risk-free rate + Beta(Market return - Risk-free rate)

Expected return = 0.04 + 1.6(0.10 - 0.04)

Expected return = 0.136 or 13.6%

b. Expected return = Risk-free rate + Beta(Market return - Risk-free rate)

Expected return = 0.04 + 1(0.10 - 0.04)

Expected return = 0.100 or 10.0%

c. Beta of the portfolio = (1.6 × 0.60) + (1 × 0.40)

Beta of the portfolio = 1.36

d. Expected return of the portfolio = (0.136 × 0.60) + (0.10 × 0.40)

Expected return of the portfolio = 0.122 or 12.2%