a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. r = 0.5%+ (10.8%) b II. r = 3.0%+ (11.4%) bi III. r = 1.1% + (10.3%) bi IV. r= 1.1% + (11.4%) b; V. r = 3.0%+ (10.3%) b -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 14%, 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 derimal places
a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. r = 0.5%+ (10.8%) b II. r = 3.0%+ (11.4%) bi III. r = 1.1% + (10.3%) bi IV. r= 1.1% + (11.4%) b; V. r = 3.0%+ (10.3%) b -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 14%, 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 derimal places
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
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Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text: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 14%, 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.
%
Transcribed Image Text:You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:
Stock
Stock's Beta Coefficient
0.7
1.3
2.0
1.0
1.7
Investment
$160 million
120 million
80 million
80 million
60 million
Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you
believe the following probability distribution for future market returns is realistic:
ABCDE
Probability Market Return
0.1
0.2
0.4
0.2
0.1
a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
I. r = 0.5% + (10.8%) b;
II. r = 3.0%+ (11.4%) bi
III. r = 1.1% + (10.3%) b;
IV. r = 1.1% + (11.4%) b;
V. r = 3.0%+ (10.3%) bi
-24%
0
12
29
51
-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 14%, 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
derimal places
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