Katie plans to form a portfolio consisting of two securities, Intel (INTC) and Procter & Gamble (PG),
Question:
Katie plans to form a portfolio consisting of two securities, Intel (INTC) and Procter & Gamble (PG), and she wonders how the portfolio's return will depend on the amount that she invests in each stock. Katie's professor suggests that she use the capital asset pricing model to define the required returns for the two companies.
rj=rf+[bj×(rm−rf)]
Katie measures rf using the current long-term Treasury bond return of 3%. Katie determines that the average return on the S&P 500 Index over the last several years is 11%, so she uses that figure to measure rm.
Estimate the beta values for INTC and PG
- Using the CAPM, create a spreadsheet to determine the required rates of return for both INTC and PG.
- Katie has decided that the portfolio will be distributed between INTC and PG in a 60% and 40% split, respectively. Hence, a weighted average can be calculated for both the returns and betas of the portfolio.
war=(wi×ri)+(wj×rj)
where war=weighted average required rate of return for the portfolio
wi=weight of security i in the portfolio
ri=required return of security i in the portfolio
wj=weight of security j in the portfolio
rj=required return of security j in the portfolio
wab=(wi×bi)+(wj×bj)
where wab=weighted average beta for the portfolio
wi=weight of security i in the portfolio
bi=beta for security i
wj=weight of security j in the portfolio
bj=beta for security j
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford