SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: stock investment Stock’s Beta Coefficient A 160 million 0.5 B 120 million 1.2 C 80 million 1.8 D 80 millon 1.0 E 60 million 1.6 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 market return 0.1 -28% 0,2 0 0.4 12 0.2 30 0.1 50 a. What is the equation for the security market line (SML)? (Hint First, determine the expected market return.) 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 lake 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?
SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: stock investment Stock’s Beta Coefficient A 160 million 0.5 B 120 million 1.2 C 80 million 1.8 D 80 millon 1.0 E 60 million 1.6 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 market return 0.1 -28% 0,2 0 0.4 12 0.2 30 0.1 50 a. What is the equation for the security market line (SML)? (Hint First, determine the expected market return.) 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 lake 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?
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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SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:
| stock | investment | Stock’s Beta Coefficient |
| A | 160 million | 0.5 |
| B | 120 million | 1.2 |
| C | 80 million | 1.8 |
| D | 80 millon | 1.0 |
| E | 60 million | 1.6 |
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 | market return |
| 0.1 | -28% |
| 0,2 | 0 |
| 0.4 | 12 |
| 0.2 | 30 |
| 0.1 | 50 |
a. What is the equation for the security market line (SML)? (Hint First, determine the expected market return.)
b. Calculate Kish’s required
c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to lake 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?
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