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,
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%
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