Question

Suppose Intel stock has a beta of 1.72​, whereas Boeing stock has a beta of 0.78. If the​ risk-free interest rate is 4.2% 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 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? (There are two ways to solve​ this.)

Answer 1

a)

Expected return	Rf+β×Rp
Here,
Risk free rate of return (Rf)	4.2%
Beta of the stock (β)	1.72
Market risk premium (Rp)	9.2%	=13.4%-4.2%
Expected return	20.02%
	4.2%+1.72×9.2%

b)

Expected return	Rf+β×Rp
Here,
Risk free rate of return (Rf)	4.2%
Beta of the stock (β)	0.78
Market risk premium (Rp)	9.2%	=13.4%-4.2%
Expected return	11.38%
	4.2%+0.78×9.2%

c)

Portfolio beta:

= 1.72*60%+0.78*40%

= 1.344

d)

Expected return	Rf+β×Rp
Here,
Risk free rate of return (Rf)	4.2%
Beta of the stock (β)	1.344
Market risk premium (Rp)	9.2%	=13.4%-4.2%
Expected return	16.56%
	4.2%+1.344×9.2%