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 10.0 %, what is the expected return of a portfolio that consists of 60 % Autodesk stock and 40 % Costco stock, according to the CAPM?

The portfolio return is 13.432%

Explanation:

The required return using CAPM

First we will calculate the required rate of return for both the stocks using the CAPM equation.

Let rA be the required rate of return for Autodesk stock and rB be the required rate of return for Costco stock.

For Autodesk, rA = 0.04 + 2.16 * (0.10 - 0.04) = 0.1696 or 16.96%

For Costco, rB = 0.04 + 0.69 * (0.10 - 0.04) = 0.0814 or 8.14%

The portfolio return is the weighted average return of stocks in the portfolio.

rP or return of portfolio = 0.6 * 0.1696 + 0.4 * 0.0814 = 0.13432 or 13.432%

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