Suppose Intel stock has a beta of 1.6 , whereas Boeing stock has a beta of 0.96 . If the risk-free interest rate is 4.7 % and the expected return of the market portfolio is 13.9 % , according to the CAPM,
a. What is the expected return of Intel stock? (Round to one decimal place.)
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.)
a. The expected return of Intel stock is computed as shown below:
= Risk free rate + Beta ( Return on market - Risk free rate )
= 0.047 + 1.6 ( 0.139 - 0.047 )
= 19.4% Approximately
b. The expected return of Boeing stock is computed as shown below:
= Risk free rate + Beta ( Return on market - Risk free rate )
= 0.047 + 0.96 ( 0.139 - 0.047 )
= 13.53% Approximately
c. The beta of the portfolio is computed as shown below:
= 0.55 x 1.6 + 0.45 x 0.96
= 1.312
d. The expected return is computed as follows:
= 0.55 x 0.1942 + 0.45 x 0.13532
= 16.77% Approximately
Feel free to ask in case of any query relating to this question
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