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What is the equation for the Security Market Line (SML)? I. rn = 4.0% + (7.5%)bi

What is the equation for the Security Market Line (SML)? I. rn = 4.0% + (7.5%)bi

Essentials Of Investments
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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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 0.8 В 120 million 1.5 80 million 1.9 80 million 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 4%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 -29 % 0.2 0.4 12 0.2 29 0.1 47 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. ri = 4.0% + (7.5%)bj II. ri = 5.8% + (8.4%)b¡ III. ri = 5.8% + (7.5%)b¡ IV. ri = 4.0% + (8.4%)b¡ V. ri = 3.2% + (10.4%)b¡ -Select- + 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 17%, and its estimated beta is 1.5. 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 Investment Stock's Beta Coefficient A $160 million 0.8 В 120 million 1.5 80 million 1.9 80 million 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 4%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 -29 % 0.2 0.4 12 0.2 29 0.1 47 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. ri = 4.0% + (7.5%)bj II. ri = 5.8% + (8.4%)b¡ III. ri = 5.8% + (7.5%)b¡ IV. ri = 4.0% + (8.4%)b¡ V. ri = 3.2% + (10.4%)b¡ -Select- + 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 17%, and its estimated beta is 1.5. 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. %
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