Question

Suppose Intel stock has a beta of

1.54

whereas Boeing stock has a beta of

0.99

If the? risk-free interest rate is

5.2 %

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

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.)

Answer 1

a)Expected return of Intel stock:

Formula = rf + b (rm – rf)

Where rf is the risk free rate, b (beta) = risk free security, rm – expected market return.

Rf = 5.2, b of Intel = 1.54, rm = 12.5

5.2 + 1.54( 12.5 – 5.2)

= 5.2 + 11.242

= 16.44%

b)Expected return of Boeing stock

B = 0.99, rf = 5.2, rm = 12.5

5.2 + 0.99(12.5 – 5.2)

= 5.2 + 7.227

=12.43%

c) Beta of portfolio:

Here the solution is obtained by multiplying the percentage of portfolio individually with their respective betas & then adding them to get the final result. Please find the solution below:

Percentage of Intel = 55%, beta of Intel = 1.54, percentage of Boeing = 45%, beta of Boeing = 0.99

0.55(1.54) +0.45(0.99)

= 0.847 + 0.446

= 1.293

Hence beta of portfolio = 1.29

d) Expected return of a portfolio:

E(R) of a portfolio = w1R1 + w2R2+ …. wnRn

= 16.44( 0.55) + 12.43 (0.45)

= 9.04 + 5.59

= 14.63%

Hence expected return of a portfolio = 14.63%