You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:StockInvestmentStock's Beta CoefficientA$160 million0.8В120 million1.580 million1.980 million1.0E60 million1.6Kish'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 marketreturns is realistic:ProbabilityMarket Return0.1-29 %0.20.4120.2290.147a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)I. ri = 4.0% + (7.5%)bjII. 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 anexpected 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.%

Introduction: Capital asset pricing model or CAPM as it is popularly known is the widely used…

Answered: What is the equation for the Security…

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

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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Question

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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