Question

Suppose SNAP stock has a beta of 1.71​, whereas Walmart stock has a beta of 0.9. If the​ risk-free interest rate is 5.5% and the expected return of the market portfolio is 10.7%​,according to the​ CAPM,

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

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

c.What is the beta of a portfolio valued at​ $1 million that consists of​ $550,000 in 60% SNAP stock and​ $450,000 invested in 40% Walmart​ stock?

d. What is the expected return of a portfolio that consists of 60% SNAP stock and 40% Walmart​ stock? (There are two ways to solve​ this.)

Answer 1

Using CAPM,

Expected Return = Risk free rate + Beta * (Market Return - Risk free rate)

a.)

Expected Return of SNAP = 5.5 + 1.71 * ( 10.7 - 5.5) = 14.39%

b.)

Expected Return of Walmart stock = 5.5 + 0.9 * (10.7 -5.5) = 10.18%

c.)

Beta1 = 1.71

Beta2 = 0.9

W1 = (550000 / 1000000) * 100 = 55%

W2 = (450000 / 1000000 ) *100 = 45%

Portfolio Beta = W1*Beta1 + W2*Beta2

Portfolio Beta = 0.55*1.71 + 0.45*0.9 = 1.35 Answer

d.)

Expected portfolio return = 0.6 * 14.39 + 0.4* 10.18 = 12.71% Answer

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