Inves $160 120

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
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8-21
capital of $500 million invested in five stocks:
Stock
Investment
Stock's Beta Coefficient
A
$160 million
0.5
В
120 million
1.2
80 million
1.8
D
80 million
1.0
60 million
1.6
Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-e
rate is 6%, and you believe the following probability distribution for future market retums
is realistic:
TT
Probability
Market Return
0.1
- 28%
0.2
0.4
12
0.2
30
0.1
50
What is the equation for the security market line (SML)? (Hint: First, determine the
expected market return.)
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 ar
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 purchasang
the stock?
а.
b.
Transcribed Image Text:8-21 capital of $500 million invested in five stocks: Stock Investment Stock's Beta Coefficient A $160 million 0.5 В 120 million 1.2 80 million 1.8 D 80 million 1.0 60 million 1.6 Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-e rate is 6%, and you believe the following probability distribution for future market retums is realistic: TT Probability Market Return 0.1 - 28% 0.2 0.4 12 0.2 30 0.1 50 What is the equation for the security market line (SML)? (Hint: First, determine the expected market return.) 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 ar 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 purchasang the stock? а. b.
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