You plan to invest in the Kish Hedge Fund, which has total capital of $500 on invested in live sto Stock A Investment $160 million B 120 million C 80 million 2.3 D 80 million 1.0 E 60 million 1.3 ish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you believe the following probability distribution for future market eturns is realistic Probability 0.1 IV. 4.1% (11.5%) b V. n-3.0 % + (11.6%)b Stock's Beta Coefficient 0.3 1.4 0.2 0.4 0.2 0.1 Market Return -25% 0 13. 32 55 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) 1. n 5.2% (10.5%) b 11. - 3.0%+ (11.5%)b III. -4.1%+ (11.6%) b -Select B 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 - 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 on invested in live sto Stock A Investment $160 million B 120 million C 80 million 2.3 D 80 million 1.0 E 60 million 1.3 ish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you believe the following probability distribution for future market eturns is realistic Probability 0.1 IV. 4.1% (11.5%) b V. n-3.0 % + (11.6%)b Stock's Beta Coefficient 0.3 1.4 0.2 0.4 0.2 0.1 Market Return -25% 0 13. 32 55 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) 1. n 5.2% (10.5%) b 11. - 3.0%+ (11.5%)b III. -4.1%+ (11.6%) b -Select B 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 - 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
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Transcribed Image Text:You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:
Stock's Beta Coefficient
0.3
1.4
2.3
1.0
E
1.3
Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you believe the following probability distribution for future market
returns is realistic:
Stock
A
B
III.
4.1% + (11,6%) b
TV.
4.1% + (11.5%) b
V. n-3.0 % + (11.6%) b)
C
Investment
$160 million
120 million
D
80 million
80 million
60 million
Market Return
-25%
0
13
0.2
32
0.1
55
a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
1.5.2% + (10.5%) b
II. n-3.0%+ (11.5%) b
Probability
0.1
0.2
0.4
-Select B
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 i
expected return of 17%, and its estimated beta is 1.5. Should Kish invest in the new company?
The new stock -
be purchased.
At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places
56
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