Question

Suppose Intel stock has a beta of 1.57, whereas Boeing stock has a beta of 0.86. If the risk-free interest rate is 6.4% and the expected return of the market portfolio is 12.8%, 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 65% Intel stock and 35% Boeing stock? d. What is the expected return of a portfolio that consists of 65% Intel stock and 35% Boeing stock? (There are two ways to solve this.)

Answer 1

a.
Formula to calculate expected return CAPM model
Expected return	Risk free rate + [Beta*(Market return - Risk free return)]
Calculation of expected return of Intel stock.
Expected return	0.064 +[(1.57*(0.128-0.064)]
Expected return	0.064 +0.10048
Expected return	16.45%
b.
Calculation of expected return of Boeing stock.
Expected return	0.064 +[(0.86*(0.128-0.064)]
Expected return	0.064 +[(0.86*(0.128-0.064)]
Expected return	0.064 +0.05504
Expected return	11.90%
c.
Calculation of beta of portfolio is shown below
Beta of portfolio	Weight of Intel*Beta of Intel + Weight of Boeing*Beta of boeing
Beta of portfolio	(0.65*1.57)+(0.35*0.86)
Beta of portfolio	1.32
d.
Calculation of expected return of portfolio is shown below
Expected return of portfolio	Weight of Intel*Return of Intel + Weight of Boeing*Return of boeing
Expected return of portfolio	(0.65*0.1645)+(0.35*0.1190)
Expected return of portfolio	14.86%