Question

Suppose Intel stock has a beta of 1.7​, whereas Boeing stock has a beta of 0.91. If the​ risk-free interest rate is 5.9% and the expected return of the market portfolio is 12.5%​, 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?

Answer 1

As per Capital Asset Pricing Model [CAPM], the Expected rate of return for the stock is calculated by using the following equation

Expected rate of return = Risk-free Rate + Beta(Market Rate of Return – Risk-free Rate)

= Rf + B[Rm – Rf]

= 5.90% + 1.70[12.50% - 5.90%]

= 5.90% + [1.70 x 6.60%]

= 5.90% + 11.22%

= 17.12%

(b)-Expected return of Boeing Stock

As per Capital Asset Pricing Model [CAPM], the Expected rate of return for the stock is calculated by using the following equation

Expected rate of return = Risk-free Rate + Beta(Market Rate of Return – Risk-free Rate)

= Rf + B[Rm – Rf]

= 5.90% + 0.91[12.50% - 5.90%]

= 5.90% + [0.91 x 6.60%]

= 5.90% + 6.01%

= 11.91%

(c)-Beta of the Portfolio

Beta of the Portfolio = [Beta of Intel Stock x Percentage of proportion] + [Beta of Boeing Stock x Percentage of proportion]

= [1.70 x 0.60] + [0.91 x 0.40]

= 1.02 + 0.36

= 1.38

(d)-Expected return of the portfolio

Expected return of the portfolio = [Expected return of Intel Stock x Percentage of proportion] + [Expected return of Boeing Stock x Percentage of proportion]

= [17.12% x 0.60] + [11.91% x 0.40]

= 10.27% + 4.77%

= 15.04%