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Suppose Intel stock has a beta of ​, whereas Boeing stock has a beta of . If the​ risk-free interest rate is and the expected return of the market portfolio is ​, 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 Intel stock and Boeing​ stock? d. What is the expected return of a portfolio that consists of Intel stock and Boeing​ stock? (There are two ways to solve​ this.

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Answer:

a. Expected return of Intel stock

= Risk free rate + Beta * ( Market return - risk free rate)

= 5.6% + 1.69(12.2% - 5.6%)

= 16.75%

b. Expected return of Boeing stock

= Risk free rate + Beta * ( Market return - risk free rate)

= 5.6% + 0.88(12.2% - 5.6%)

= 11.40%

c. Beta of a Portfolio with 60% Intel stock and 40% Boeing stock.

= Weighted average of betas

= (0.6 * 1.69) + ( 0.4 * 0.88)

= 1.37

d. First method - Weighted average of both returns

= (0.6 * 16.75%) + (0.4 * 11.40%)

= 14.6%

Second method - Use the Portfolio beta and CAPM

= Risk free rate + Beta * ( Market return - risk free rate)

= 5.6% + 1.37(12.2% - 5.6%)

= 14.6%

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