Morden Company Investment Fund has a total investment of $400 million in five stocks:

StockInvestmentBeta

A$120 million0.5

B$100 million2.0

CXX4.0

D$80 million1.0

E$40 million3.0

The risk-free rate is 7%, and the market return has the following probability distribution: ProbabilityMarket Return

0.18%

0.210%

0.412%

0.214%

0.116%

a. What is the estimated equation for the security market line (SML)?

b. Compute the required rate of return on the fund.

c. Suppose the management receives a proposal for a new stock. The investment needed to take a position in the stock is $50 million; it will have an expected return of 16%; and its estimated beta coefficient is 2.5. Should the new stock be purchased? At what expected rate of return would management be indifferent to purchasing the stock?