You plan to invest in the Kish Hedge Fund, which has total
capital of $500 million invested in five stocks given below:
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
0.1 228%
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 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?
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