QUESTION 2: High Finance Investment Fund has a total investment of $400 million in 5 stocks: Stock Investment Beta A $120 million 0.5 B 100 million 2.0 C 60 million 4.0 D 80 million 1.0 E 40 million 3.0 The risk free rate is 7%, and the market return has the following probability distribution: Probability Market Return 0.1 8% 0.2 10 0.4 12 0.2 14 0.1 16 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?

QUESTION 2: High Finance Investment Fund has a total investment of $400 million in 5 stocks: Stock Investment Beta A $120 million 0.5 B 100 million 2.0 60 million 4.0 D 80 million 1.0 E 40 million 3.0 The risk free rate is 7%, and the market return has the following probability distribution: Probability Market Return 0.1 8% 0.2 10 0.4 12 0.2 14 0.1 16 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