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. %
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
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.
%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education