You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Stock's Beta Coefficient 0.4 1.0 1.8 1.0 1.3. Stock A B Investment $160 million 120 million 80 million 80 million 60 million с D E 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 0.1 0.2 0.4 0.2 0.1 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) Market Return -Select- -24% 0 11 30 53 I. n 3.8% + (10.1%) bi II.4.0 % + (9.6%) bi III. = 5.9% + (9.3%) bi IV. 5.9% + (9.6%) bi V. n 4.0 % + (9.3%) bi 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 expecte return of 15%, and its estimated beta is 1.4. 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. %
You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Stock's Beta Coefficient 0.4 1.0 1.8 1.0 1.3. Stock A B Investment $160 million 120 million 80 million 80 million 60 million с D E 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 0.1 0.2 0.4 0.2 0.1 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) Market Return -Select- -24% 0 11 30 53 I. n 3.8% + (10.1%) bi II.4.0 % + (9.6%) bi III. = 5.9% + (9.3%) bi IV. 5.9% + (9.6%) bi V. n 4.0 % + (9.3%) bi 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 expecte return of 15%, and its estimated beta is 1.4. 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. %
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter2: Risk And Return: Part I
Section: Chapter Questions
Problem 15MC
Related questions
Question
Transcribed Image Text:You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:
Stock
A
B
C
D
E
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:
Investment
$160 million
120 million
80 million
80 million
60 million
Probability
0.1
0.2
0.4
0.2
0.1
a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
Stock's Beta Coefficient
0.4
1.0
1.8
1.0
1.3
-Select-
◆
Market Return
I. r₁ = 3.8% + (10.1%) bi
II. r = 4.0% + (9.6%)bi
III. r₁ = 5.9% + (9.3%)bi
IV. r₁ = 5.9% + (9.6%)bi
V. r₁ = 4.0% + (9.3%)bi
-24%
0
11
30
53
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 15%, and its estimated beta is 1.4. 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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