SECURITY MARKET LINE You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:stockinvestmentStock’s Beta CoefficientA160 million0.5B120 million1.2C80 million1.8D80 millon1.0E60 million1.6Kish’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:probabilitymarket return0.1-28%0,200.4120.2300.150a. What is the equation for the security market line (SML)? (Hint First, determine the expected market return.)b. Calculate Kish’s required rate of return.c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to lake 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?

Security Market Line helps to find out whether the return offered by the investment is favorable in…

Answered: SECURITY MARKET LINE You plan to invest…

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

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 5FPE: Assume that you’ve just inherited $500,000 and have decided to invest a big chunk of it ($350,000,...

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SECURITY MARKET LINE 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 millon	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

a. What is the equation for the security market line (SML)? (Hint First, determine the expected market return.)

b. Calculate Kish’s required rate of return.

c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to lake 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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