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
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. (Refer to Equations 5.4 and 5.4a.)
rj=rf+bjrmrf
Katie measures
rrf
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.
a. Estimate the beta values for INTC and PG using the method described in the chapter and demonstrated in Figure 5.5. and this table of the stock returns and market return,
The estimated beta values:(Select the best answer below.)
A. are -0.1195 for Intel (INTC) and -0.185 for Procter & Gamble (PG).
B. are 0.185 for Intel (INTC) and -0.1195 for Procter & Gamble (PG).
C. are 0.185 for Intel (INTC) and 0.1195 for Procter & Gamble (PG).
D. are -0.185 for Intel (INTC) and -0.1195 for Procter & Gamble (PG).
b. Using the CAPM, determine the required rates of return for both INTC and PG.
c. Katie has decided that the portfolio will be distributed between INTC and PG in a 65% and 35% split, respectively. Hence, a weighted average can be calculated for both the returns and betas of the portfolio. This concept is shown in the spreadsheet for Table 5.2, which can be viewed at
Create a spreadsheet using the following models for the calculations:
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