Question

Suppose Intel stock has a beta of 1.44​, whereas Boeing stock has a beta of 0.8. If the​ risk-free interest rate is 6.4 % and the expected return of the market portfolio is 10.5 %​, 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 55 % Intel stock and 45 % Boeing​ stock?

d. What is the expected return of a portfolio that consists of 55 % Intel stock and 45 % Boeing​ stock? (There are two ways to solve​ this.)

Answer 1

(a) Calculation of Expected return of Intel stock using CAPM:

= R_f + β(R_m - R_f)

= 6.4+ 1.44*(10.5-6.4)

= 6.4+5.904

= 12.304%

(b) Calculation of Expected return of Boeing stock using CAPM:

= R_f + β(R_m - R_f)

= 6.4+ 0.80*(10.5-6.4)

= 6.4+3.28

= 9.68%

(c) Calculation of Beta of the portfolio consisting 55% Intel stock and 45% Boeing stock:

= 1.44*0.55+0.80*0.45

= 1.152

(d) Calculation of Expected return of the portfolio consisting 55% Intel stock and 45% Boeing stock:

= 12.304*0.55+9.68*0.45

= 11.1232%