SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of...

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Finance

SECURITY MARKET LINE
You plan to invest in the Kish Hedge Fund, which has totalcapital of $500 million invested in five stocks:
Stock Investment Stock's Beta Coefficient
A $160 million 0.6
B 120 million 2.0
C 80 million 3.9
D 80 million 1.0
E 60 million 2.7
Kish's beta coefficient can be found as a weighted average ofits stocks' betas. The risk-free rate is 4%, and you believe thefollowing probability distribution for future market returns isrealistic:
Probability Market Return
0.1 (5%)
0.2 9
0.4 11
0.2 13
0.1 16
What is the equation for the Security Market Line (SML)?(Hint: First determine the expected market return.)
r_i = 2.9% + (5.9%)b_i
r_i = 2.9% + (5.0%)b_i
r_i = 4.0% + (5.9%)b_i
r_i = 1.6% + (7.1%)b_i
r_i = 4.0% + (5.0%)b_i

Calculate Kish's required rate of return. Do not roundintermediate calculations. Round your answer to two decimalplaces.
%
Suppose Rick Kish, the president, receives a proposal from acompany seeking new capital. The amount needed to take a positionin the stock is $50 million, it has an expected return of 15%, andits estimated beta is 1.5. Should Kish invest in the newcompany?
The new stock
be purchased.

At what expected rate of return should Kish be indifferent topurchasing the stock? Round your answer to two decimalplaces.
%

Answer & Explanation Solved by verified expert

3.9 Ratings (612 Votes)

arM Pi x rMi 01 x 5 02 x 9 04 x 11 02 x 13 01 x16 05 18 44 26 16 99According to SMLri rf birm rf 4 bi99 4 4 See Answer

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Transcribed Image Text

SECURITY MARKET LINEYou plan to invest in the Kish Hedge Fund, which has totalcapital of $500 million invested in five stocks:StockInvestmentStock's Beta CoefficientA$160 million0.6B120 million2.0C80 million3.9D80 million1.0E60 million2.7Kish's beta coefficient can be found as a weighted average ofits stocks' betas. The risk-free rate is 4%, and you believe thefollowing probability distribution for future market returns isrealistic:ProbabilityMarket Return0.1(5%)0.290.4110.2130.116What is the equation for the Security Market Line (SML)?(Hint: First determine the expected market return.)ri = 2.9% + (5.9%)biri = 2.9% + (5.0%)biri = 4.0% + (5.9%)biri = 1.6% + (7.1%)biri = 4.0% + (5.0%)biCalculate Kish's required rate of return. Do not roundintermediate calculations. Round your answer to two decimalplaces.%Suppose Rick Kish, the president, receives a proposal from acompany seeking new capital. The amount needed to take a positionin the stock is $50 million, it has an expected return of 15%, andits estimated beta is 1.5. Should Kish invest in the newcompany?The new stockbe purchased.At what expected rate of return should Kish be indifferent topurchasing the stock? Round your answer to two decimalplaces.%

Stock	Investment	Stock's Beta Coefficient
A	$160 million	0.6
B	120 million	2.0
C	80 million	3.9
D	80 million	1.0
E	60 million	2.7