SECURITY MARKET LINE

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:

Stock	Investment	Stock's Beta Coefficient
A	$160 million	0.7
B	120 million	2.0
C	80 million	4.0
D	80 million	1.0
E	60 million	2.8

Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you believe the following probability distribution for future market returns is realistic:

Probability	Market Return
0.1	(5%)
0.2	9
0.4	12
0.2	14
0.1	17

What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)

r_i = 5.8% + (6.3%)b_i

r_i = 3.0% + (7.6%)b_i

r_i = 3.4% + (8.2%)b_i

r_i = 3.0% + (6.3%)b_i

r_i = 5.8% + (7.6%)b_i

-Select-IIIIIIIVVItem 1

Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. %

Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has an expected return of 14%, and its estimated beta is 1.5. Should Kish invest in the new company? The new stock -Select-should notshouldItem 3 be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. %