Suppose Intel stock has a beta of 1.54 whereas Boeing stock has a beta of 0.99 I
ID: 2616132 • Letter: S
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.)
Explanation / Answer
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%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.