3. (20 marks) Tom plans to invest the Global Investment Fund, which holds 4 stocks, and...

 

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3. (20 marks) Tom plans to invest the Global Investment Fund, which holds 4 stocks, and the Fund's assets are as follows: Stock Investment Beta A $120,000 1.60 B $200,000 -0.50 C $180,000 1.35 D $100,000 0.75 Tom believes economic conditions during the next year will be strong, normal, or weak, and he thinks that the market returns will have the probability distribution shown below. Assume the risk-free rate is 5.25%, Conditions Economic Prob. Market Return Strong 25% Normal 50% Weak 25% 36.0% 12.0% -15.0% a). From on the information stated above, what is the equation for the Security Market Line (SML) in this market? (4 marks) b). What is required rate of return for this portfolio? (4 marks) c). Tom expects to receive an additional $200 thousand which he plans to invest in additional stocks. After investing the additional funds, he wants the fund's required and expected return to be 12.45 %. What must the average beta of the new stocks be to achieve the target required rate of return? (8 marks) 3. (20 marks) Tom plans to invest the Global Investment Fund, which holds 4 stocks, and the Fund's assets are as follows: Stock Investment Beta A $120,000 1.60 B $200,000 -0.50 C $180,000 1.35 D $100,000 0.75 Tom believes economic conditions during the next year will be strong, normal, or weak, and he thinks that the market returns will have the probability distribution shown below. Assume the risk-free rate is 5.25%, Conditions Economic Prob. Market Return Strong 25% Normal 50% Weak 25% 36.0% 12.0% -15.0% a). From on the information stated above, what is the equation for the Security Market Line (SML) in this market? (4 marks) b). What is required rate of return for this portfolio? (4 marks) c). Tom expects to receive an additional $200 thousand which he plans to invest in additional stocks. After investing the additional funds, he wants the fund's required and expected return to be 12.45 %. What must the average beta of the new stocks be to achieve the target required rate of return? (8 marks)