Question
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
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 | 0.4 |
B | 120 million | 1.2 |
C | 80 million | 2.1 |
D | 80 million | 1.0 |
E | 60 million | 1.3 |
Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 5%, and you believe the following probability distribution for future market returns is realistic:
Probability | Market Return | |
0.1 | -26 | % |
0.2 | 0 | |
0.4 | 13 | |
0.2 | 32 | |
0.1 | 49 |
What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
a. ri = 5.0% + (8.8%)bi
b. ri = 2.9% + (8.9%)bi
c. ri = 2.9% + (8.8%)bi
d. ri = 5.0% + (8.9%)bi
ri = 5.2% + (8.7%)bi
2. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places.
%
3. 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 16%, and its estimated beta is 1.4. Should Kish invest in the new company?
The new stock: should not or should be purchased
4. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places.
%
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