Question

Suppose Intel stock has a beta of 0.71, whereas Boeing stock has a beta of 1.22. If the fisk-free interest rate is 3.2% and the expected return of the market portfolio is 13.1%, 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% Boning 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.)

a. What is the expected foturn of Intel stock? Inters expected return is __%. (Round to one decimal place.)

Answer 1

The expected return of Intel stock is 10.229%. The expected return of Boeing stock is 15.278%. The beta of a portfolio consisting of 55% Intel stock and 45% Boeing stock is 0.9395. The expected return of a portfolio consisting of 55% Intel stock and 45% Boeing stock is 12.50105%.

Step-by-step explanation:

To calculate the expected return of Intel stock using the CAPM, we can use the formula:

Expected Return = Risk-Free Rate + Beta * (Expected Return of Market Portfolio - Risk-Free Rate)

Given:

• Beta of Intel stock = 0.71
• Risk-Free Interest Rate = 3.2%
• Expected Return of Market Portfolio = 13.1%

Substituting the values into the formula:

Expected Return of Intel stock = 3.2% + 0.71 * (13.1% - 3.2%)

Calculating the expression:

Expected Return of Intel stock = 3.2% + 0.71 * 9.9%

Expected Return of Intel stock = 3.2% + 7.029%

Expected Return of Intel stock = 10.229%

Therefore, the expected return of Intel stock is 10.229%.

To calculate the expected return of Boeing stock, we can use the same formula:

Expected Return = Risk-Free Rate + Beta * (Expected Return of Market Portfolio - Risk-Free Rate)

Given:

• Beta of Boeing stock = 1.22
• Risk-Free Interest Rate = 3.2%
• Expected Return of Market Portfolio = 13.1%

Substituting the values into the formula:

Expected Return of Boeing stock = 3.2% + 1.22 * (13.1% - 3.2%)

Calculating the expression:

Expected Return of Boeing stock = 3.2% + 1.22 * 9.9%

Expected Return of Boeing stock = 3.2% + 12.078%

Expected Return of Boeing stock = 15.278%

Therefore, the expected return of Boeing stock is 15.278%.

To calculate the beta of a portfolio that consists of 55% Intel stock and 45% Boeing stock, we can use the formula:

Beta of Portfolio = Weight of Intel stock * Beta of Intel stock + Weight of Boeing stock * Beta of Boeing stock

Given:

• Weight of Intel stock = 55%
• Weight of Boeing stock = 45%
• Beta of Intel stock = 0.71
• Beta of Boeing stock = 1.22

Substituting the values into the formula:

Beta of Portfolio = 55% * 0.71 + 45% * 1.22

Calculating the expression:

Beta of Portfolio = 0.3905 + 0.549

Beta of Portfolio = 0.9395

Therefore, the beta of the portfolio consisting of 55% Intel stock and 45% Boeing stock is 0.9395.

To calculate the expected return of a portfolio that consists of 55% Intel stock and 45% Boeing stock, we can use the formula:

Expected Return of Portfolio = Weight of Intel stock * Expected Return of Intel stock + Weight of Boeing stock * Expected Return of Boeing stock

Given:

• Weight of Intel stock = 55%
• Weight of Boeing stock = 45%
• Expected Return of Intel stock = 10.229%
• Expected Return of Boeing stock = 15.278%

Substituting the values into the formula:

Expected Return of Portfolio = 55% * 10.229% + 45% * 15.278%

Calculating the expression:

Expected Return of Portfolio = 5.62595% + 6.8751%

Expected Return of Portfolio = 12.50105%

Therefore, the expected return of a portfolio consisting of 55% Intel stock and 45% Boeing stock is 12.50105%.