Question

Suppose Autodesk stock has a beta of 2.20​, whereas Costco stock has a beta of 0.68. If the​ risk-free interest rate is 6 % and the expected return of the market portfolio is 14.0 %​, what is the expected return of a portfolio that consists of 70 % Autodesk stock and 30 % Costco​ stock, according to the​ CAPM?

Answer 1

19.952%

Step-by-step explanation:

For computing the expected rate of return, first we have to determine the beta which is shown below:

= Stock Auto desk weightage × stock Auto desk beta + Stock Costco weightage × stock Costco beta

= 0.70 × 2.20+ 0.30 × 0.68

= 1.54 + 0.204

= 1.744

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 6% + 1.744 × (14% - 6%)

= 6% + 1.744 × 8%

= 6% + 13.952%

= 19.952%