Question

Suppose Intel stock has a beta of 1.52​, whereas Boeing stock has a beta of 0.88. If the​ risk-free interest rate is 4.1% and the expected return of the market portfolio is 12.2%​, 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 70 % Intel stock and 30% Boeing​ stock?

d. What is the expected return of a portfolio that consists of 70% Intel stock and 30% Boeing​ stock? (There are two ways to solve​ this.)

Answer 1

According to CAPM model, expected return=Risk free rate+Beta*(Market return-Risk free rate)

Part a:

For Intel stock:
Risk free rate=4.1%
Market return=12.2%
Beta=1.52
Expected return=4.1%+1.52*(12.2%-4.1%)
=4.1%+1.52*(0.081)
=4.1%+0.12312
=0.16412 or 16.41% (Rounded to two decimal places)

Part b:

For Boeing​ stock:
Risk free rate=4.1%
Market return=12.2%
Beta=0.88
Expected return=4.1%+0.88*(12.2%-4.1%)
=4.1%+0.88*(0.081)
=4.1%+0.07128
=0.11228 or 11.23% (Rounded to two decimal places)

Part c:
Portfolio beta=(Percentage invested in Intel stock)*(Beta of Intel stock)+(Percentage invested in Boeing stock)*(Beta of Boeing stock)
Given that, 70% of the portfolio is invested in Intel stock and 30% in Boeing​ stock.
Portfolio beta=70%*1.52+30%*0.88
=1.064+0.264
=1.328

Part d:
Expected return of the portfolio=(Percentage invested in Intel stock)*(Return on Intel stock)+(Percentage invested in Boeing stock)*(Return on Boeing stock)
Given that, 70% of the portfolio is invested in Intel stock and 30% in Boeing​ stock.
Expected return of the portfolio=70%*0.16412+30%*0.11228
=0.114884+0.033684
=0.148568 or 14.86% (Rounded to two decimal places)