Question

In: Finance

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million...

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 1.4
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 5%, and you believe the following probability distribution for future market returns is realistic:

Probability Market Return
0.1 -29 %
0.2 0
0.4 12
0.2 31
0.1 50
  1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)

    1. ri = 3.7% + (7.3%)bi
    2. ri = 5.0% + (6.9%)bi
    3. ri = 4.0% + (8.1%)bi
    4. ri = 4.0% + (6.9%)bi
    5. ri = 5.0% + (8.1%)bi

    -Select-IIIIIIIVV

  2. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places.

    %

  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 14%, and its estimated beta is 1.5. Should Kish invest in the new company?

    The new stock -Select-should notshould be purchased.

    At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places.

    %

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -


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