Question

Suppose Intel stock has a beta of 1.8​, whereas Boeing stock has a beta of 0.84. If the​ risk-free interest rate is 3.8 % 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 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) Expected Return of Intel Stock =Risk Free Rate+beta*(Market Portfolio-Risk Free rate) =3.8%+1.8*(13.4%-3.8%)=21.08%

b)Expected Return of Boeing Stock =Risk Free Rate+beta*(Market Portfolio-Risk Free rate) =3.8%+0.84*(13.4%-3.8%)=11.86%

c. Beta of Portfolio =Weight of Intel Stock*Beta of Intel Stock+Weight of Boeing Stock*Beta of Boeing Stock
=55%*1.8+45%*0.84 =1.368

d. Expected Return of Portfolio =Risk Free Rate+Beta*(Market Return -Risk Free Rate)=3.8%+1.368*(13.4%-3.8%)=16.93%