Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Investment Stock's Beta Coefficient Stock
You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Investment Stock's Beta Coefficient Stock A B $160 million 0.4 120 million 1.5 C 80 million 2.0 D 80 million. 1.0 E 60 million 1.4 Kish's 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 0.1 0.2 0.4 0.2 0.1 Market Return -29% 0 13 32 53 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. n = 6.0% + (8.0%)bi II. r9.8% + (8.2%)bi III. r = 6.0% + (9.2%)bi IV. r = 4.2% + (8.0%)bi V. r = 4.2% + (9.2%)bi -Select- v b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % c. 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 -Select- be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started