Question

Suppose intel stock has a beta of 1.64​, whereas boeing stock has a beta of 0.94. if the​ risk-free interest rate is 4.6 % and the expected return of the market portfolio is 13.9 %​, 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 60 % intel stock and 40 % boeing​ stock?
d. what is the expected return of a portfolio that consists of 60 % intel stock and 40 % boeing​ stock? (there are two ways to solve​ this.)

Answer 1

a. Expected Return of Intel Stock = Risk Free Rate (Rf) + Beta of Intel × (Expected Return on Market - Risk Free Rate)

Expected Return of Intel Stock = 4.6% + 1.64 × (13.90% - 4.60%)

Expected Return of Intel Stock = 19.85%

b. Expected Return of Boeing Stock = 4.6% + 0.94 × (13.90% - 4.60%)

= 13.34%

c. Beta of the portfolio = Bet of Intel Stock × 60% + Beta of Boeing Stock × 40%

= 1.64 × 0.6 + 0.94 × 0.4

= 1.36

Beta of a portfolio = 1.36

d. Expected Return on a portfolio = Rf + beta of portfolio*(Rm - Rf)

= 4.6% + 1.36*(13.90% - 4.60%)

= 17.248%