Suppose Autodesk stock has a beta of 2.16 whereas Costco stock has a beta of 0.69. If the risk-free

QUESTION

Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?
Concept: According to CAPM Model: Required Rate of Return = Risk free Rate + Beta*(Market Return Risk Free Rate) Portfolio Beta = Weight 1*Beta 1 + .. + Weight n*Beta n Solution: Autodesk stock Beta =2.16 Costco stock Beta =0.69 Autodesk stock Weight = 60% Costco stock Weight =

40% Beta of Portfolio = 60%*2.16 + 40%*0.69 = 1.572 Risk-free Interest Rate =4% Expected Return of the Market Portfolio =10% Expected Return of a Portfolio = 4% + 1.572*(10% 4%) = 13.432%

ANSWER:

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