Suppose Bank of America Stock

Before getting to the solution we should know the CAPMequation.

E(R_i) = R_f + Beta_stock[E(R_m) – R_f ]

where, E(R_i) = Expected Return of the Stock

R_f = Risk-free Rate

Beta_stock = Beta of the Stock

E(R_m) = Expected return of the market portfolio

A.) Using the above equation and the information provided in thequestion,

E(R₁) = 1.78% + 1.32 (10% – 1.78%) = 12.6304%

B.) Using the above equation and the information provided in thequestion,

E(R₂) = 1.78% + 1.23 (10% – 1.78%) = 11.8906%

C.) Beta of Portfolio = w₁Beta₁ +w₂Beta₂

where, w₁ = weight of Bank of America Stock

Beta₁ = Beta of Bank of America Stock

w₂ = weight of Boeing Stock

Beta₂ = Beta of Boeing Stock

Beta of Porfolio = .45 X 1.32 + .55 X 1.23 = 1.2705

D.) E(R_p) = w₁E(R₁) +w₂E(R₂)

where, E(R_p) = Expected return of the portfolio

w₁ = weight of Bank of America Stock

E(R₁) = Expected Return of Bank of America Stock[From Part A]

w₂ = weight of Boeing Stock

E(R₂) = Expected Return of Boeing Stock [FromPart B]

E(R_p) = .45 X 12.6304% + .55 X 11.8906 = 12.2235%

Another way of Calculating Portfolio Expected Return,

As we already know Portfolio Beta, Risk-free Rate and ExpectedReturn on market Portfolio, we can apply CAPM equation.

E(R_p) = 1.78% + 1.2705(10% – 1.78%) = 12.2235%.