Subject: FInancial strategy & policy

Question # 2 (part ii)

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

Stock Investment Stocks Beta Coefficient

A $160 million 0.5

B 120 million 1.2

C 80 million 1.8

D 80 million 1.0

E 60 million 1.6

Kishs beta coefficient can be found as a weighted average of its stocks betas. The risk-free rate is 6%, and you believe the following

probability distribution for future market returns is realistic:

Probability Market Return

0.1 28%

0.2 0

0.4 12

0.2 30

0.1 50

a) What is the equation for the Security Market Line (SML)?

b) Calculate Kishs required rate of return.