Question

P 12-32 (similar to) Suppose Intel stock has a beta of 1.46, whereas Boeing stock has a beta of 0.79. 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 retum 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 retum of a portfolio that consists of 65% Intel stock and 35% Boeing stock (There are two ways to solve this.

Answer 1

Beta of Intel Stock = 1.46

Beta of Boeing Stock = 0.79

Risk Free Rate = 3.8%

Market Portfolio Return = 13.4%

Part A

Expected Return of Intel Stock = 3.8% + 1.46 * (13.4% - 3.8%)

Expected Return of Intel Stock = 17.82%

Part B

Expected Return of Boeing Stock = 3.8% + 0.79 * (13.4% - 3.8%)

Expected Return of Boeing Stock = 11.38%

Part C

Beta of portfolio = 0.65 * 1.46 + 0.35 * 0.79

Beta of portfolio = 1.23

Part D

First Method - By CAPM

Return of Portfolio = 3.8% + 1.23 * (13.4% - 3.8%)

Return of Portfolio = 15.56%

Second Method - By Weighted Average

Portfolio Return = 0.65 * 17.82% + 0.35 * 11.38%

Portfolio Return = 15.56%