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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 0.8
B 120 million 1.3
C 80 million 2.2
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 7%, and you believe the following probability distribution for future market returns is realistic:

Probability Market Return
0.1 -25%
0.2 0
0.4 12
0.2 31
0.1 49
  1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
    1. ri = 4.5% + (5.0%)bi
    2. ri = 7.0% + (6.9%)bi
    3. ri = 5.6% + (6.4%)bi
    4. ri = 5.6% + (6.9%)bi
    5. ri = 7.0% + (6.4%)bi
    -Select-IIIIIIIVVItem 1
  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 15%, 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. %

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