Suppose Intel stock has a beta of 1.6, whereas Boeing stock has a beta of 1. If

Question

Suppose Intel stock has a beta of 1.6, whereas Boeing stock has a beta of 1. If the risk-free interest rate is 4.0% and the expected return of the market portfolio is 10.0%, 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? (Show both ways to solve this.)

Explanation / Answer

a. Epected return = Rf + [Beta x (Rm-Rf)]

= 4 + [1.6 x (10-4)]

= 13.60%

b. Epected return = Rf + [Beta x (Rm-Rf)]

= 4 + [1 x (10-4)]

= 10%

c. Portfolio Beta = [1.60 x 0.60] + [1 x 0.40] = 1.36

d. Portfolio return = [Expected return of stock intel x Weight of stock intel] + [Expected return of stock Boeing x Weight of stock Boeing]

= [13.60 x 0.60] + [10 x 0.40]

= 12.16%

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