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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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