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    Capital Asset Pricing Model of Boeing Co.

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    What is the estimated beta coefficient of Boeing Co?
    a. What is the estimated beta coefficient of Boeing Co? What does this beta mean in terms of your choice to include Boeing in your overall portfolio?

    b. Given the beta of Boeing Co, the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium (that is - the difference between the expected rate of return on the 'market portfolio' and the risk-free rate of interest) is 6.5%, use the CAPM equation in order to find out what is the present 'cost of equity' of Boeing Co? Explain what is the meaning of the 'cost of equity'.

    c. Choose two other companies, look up their "Beta" and report the names of these companies and their betas. Suppose you invest one third of your money in each of the stocks of these companies. What will the beta of the portfolio be? Given the data in (b), what will the Expected Rate of Return on this portfolio be? Do you feel that the three-stock portfolio is sufficiently diversified or does it still have risk that can be diversified away? Explain.

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    Solution Preview

    a. Estimated Beta is 1.28. You can look at the following web site
    http://finance.yahoo.com/q/ks?s=BA

    The value may change from day to day. This is the value as of 3/18/2009.

    The choice to include or exclude Boeing in the overall portfolio depends on the other stocks in the portfolio. In order to have a truly diverse portfolio and thus get the largest return per unit of risk, I need to make sure that other stocks in my portfolio are negatively ...

    Solution Summary

    The solution provides step by step explanation is provided for each part of the question which makes it very easy to follow along for anyone with a basic understanding of the concepts.

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