Answered step by step
Verified Expert Solution
Link Copied!

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. %
image text in transcribed
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: a. What is the equation for the Security Market Une (SML)? (Hint: First determine the expected market return.) I. n=6.0%+(8.0%)b II. n=9.8%+(8.2%)b III. n=6.0%+(9.2%)b1 IV. n=4.2%+(8.0%)bi V,n=4.2%+(9.2%)bi 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, recelves 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 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

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Real Estate Finance

Authors: David Sirota

11th Edition

1419520911, 9781419520914

More Books

Students also viewed these Finance questions

Question

Name each molecule. a. b. C

Answered: 1 week ago