Question

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	0.7
B	120 million	1.5
C	80 million	2.2
D	80 million	1.0
E	60 million	1.7

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:

Probability	Market Return
0.1	-24	%
0.2	0
0.4	14
0.2	30
0.1	45

1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
   1. r_i = 1.5% + (11.8%)b_i
   2. r_i = 3.0% + (9.5%)b_i
   3. r_i = 2.7% + (10.7%)b_i
   4. r_i = 2.7% + (9.5%)b_i
   5. r_i = 3.0% + (10.7%)b_i

   -Select-

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 1.4. Should Kish invest in the new company?

   The new stock -Select-should or should not

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

     %

Answer 1

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