Question: You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Kishs beta coefficient can be

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:

Investment $160 million 120 million 80 million 80 million 60 million Stock's Beta Coefficient 0.5 1.2 1.8 1.0 1.6 Stock

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:

Investment $160 million 120 million 80 million 80 million 60 million Stock's

a. What is the equation for the Security Market Line (SML)?

b. Calculate Kish’s required rate of return.

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 15%, and its estimated beta is 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock?

Investment $160 million 120 million 80 million 80 million 60 million Stock's Beta Coefficient 0.5 1.2 1.8 1.0 1.6 Stock A B

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a r RF 6 given Therefore the SML equation is r i r RF r M r RF b i 6 13 6b i 6 7b i b ... View full answer

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