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Suppose Intel stock has a beta of 0
Suppose Intel stock has a beta of 0.83, whereas Boeing stock has a beta of 1.21. If the risk-free interest rate is 3.1% and the expected return of the market portfolio is 10.4%, 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 70% Intel stock and 30% Boeing stock? d. What is the expected return of a portfolio that consists of 70% Intel stock and 30% Boeing stock? (There are two ways to solve this.) a. What is the expected return of Intel stock? Intel's expected return is %. (Round to one decimal place.)
Expert Solution
Using CAPM, required rate can be calculated as Rf+Beta*(Rm-Rf); where Rf is risk free rate, Rm is market return and Rm-Rf is market risk premium.
a).
Expected return of Intel Stock= 3.1%+0.83*(10.4%-3.1%)= 9.2%
b).
Expected return of Boeing Stock= 3.1%+1.21*(10.4%-3.1%)= 11.9%
c).
Expected Beta of a 2 stock portfolio is a weighted average of individual Betas. It is calculated as (w1*Beta1)+(w2*Beta2).
Expected Return= (70%*0.83)+(30%*1.21)= 0.94
when rounded to one decimal it will be 0.9
d).
Expected Return of a 2 stock portfolio is a weighted average of individual returns. It is calculated as (w1*r1)+(w2*r2)
Expected Return= (70%*9.16%)+(30%*11.93%)= 9.99%
when rounded to one decimal it will be 10.0%
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