Suppose Autodesk stock has a beta of 2.20 , whereas Costco stock has a beta of 0.68. If the risk-free interest rate is 6 % and the expected return of the market portfolio is 14.0 % , what is the expected return of a portfolio that consists of 70 % Autodesk stock and 30 % Costco stock, according to the CAPM?

19.952%

Explanation:

For computing the expected rate of return, first we have to determine the beta which is shown below:

= Stock Auto desk weightage * stock Auto desk beta + Stock Costco weightage * stock Costco beta

= 0.70 * 2.20 + 0.30 * 0.68

= 1.54 + 0.204

= 1.744

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 6% + 1.744 * (14% - 6%)

= 6% + 1.744 * 8%

= 6% + 13.952%

= 19.952%