ou plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:StockInvestmentStock's Beta CoefficientA$160 million0.5B120 million1.5C80 million1.8D80 million1.0E60 million1.4Kish'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:ProbabilityMarket Return0.1-25%0.20 0.413 0.230 0.151 What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) ri = 0.8% + (10.8%)biri = 0.8% + (12.3%)biri = 3.0% + (10.8%)biri = 2.3% + (10.2%)biri = 3.0% + (12.3%)bi Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. %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?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. %

Beta is a measure of a security's or portfolio's volatility (or systematic risk) in comparison to…

Answered: Calculate Kish's required rate of…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 7FPE

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Question

ou 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	1.5
C	80 million	1.8
D	80 million	1.0
E	60 million	1.4

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	-25	%
0.2	0
0.4	13
0.2	30
0.1	51

What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
1. r_i = 0.8% + (10.8%)b_i
2. r_i = 0.8% + (12.3%)b_i
3. r_i = 3.0% + (10.8%)b_i
4. r_i = 2.3% + (10.2%)b_i
5. r_i = 3.0% + (12.3%)b_i
Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places.

%
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?
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.

%