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 0.5 B 120 million 1.2 C 80 million 1.8 D 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 6%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 –28% 0.2 0 0.4 12 0.2 30 0.1 50 (1)What is the equation for the Security Market Line (SML)? (Hint: First, determine the expected market return.) (2)Calculate Kish’s required rate of return. (3)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 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock?
- 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 |
0.5 |
|
B |
120 million |
1.2 |
|
C |
80 million |
1.8 |
|
D |
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 6%, and you believe the following probability distribution for future market returns is realistic:
Probability Market Return
|
0.1 |
–28% |
|
0.2 |
0 |
|
0.4 |
12 |
|
0.2 |
30 |
|
0.1 |
50 |
(1)What is the equation for the Security Market Line (SML)? (Hint: First, determine the expected market return.)
(2)Calculate Kish’s required
(3)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 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock?
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