hapter Problems Week13 - CAPM and SML You plan to invest in the Kish Hedge Fund,...

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hapter Problems Week13 - CAPM and SML 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 0.8 B 120 million 1.6 C 80 million 2.1 D E 1.0 1.8 80 million 60 million Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 4%, and you believe the following probability distribution for future market returns is realistic: Probability 0.1 Market Return -28% 0.2 0 0.4 13 0.2 0.1 32 54 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. n = 7.7% + (12.2%)bi II. r = 4.0% + (10.2%) bi III. r = 4.9% + (11.5%) bi IV. r = 4.0% + (12.2%)bi V. r = 7.7% + (10.2%) bi IV b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. 16 % c. 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 16%, and its estimated beta is 1.4. Should Kish invest in the new company? The new stock should not v be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. 11.08 % hapter Problems Week13 - CAPM and SML 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 0.8 B 120 million 1.6 C 80 million 2.1 D E 1.0 1.8 80 million 60 million Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 4%, and you believe the following probability distribution for future market returns is realistic: Probability 0.1 Market Return -28% 0.2 0 0.4 13 0.2 0.1 32 54 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. n = 7.7% + (12.2%)bi II. r = 4.0% + (10.2%) bi III. r = 4.9% + (11.5%) bi IV. r = 4.0% + (12.2%)bi V. r = 7.7% + (10.2%) bi IV b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. 16 % c. 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 16%, and its estimated beta is 1.4. Should Kish invest in the new company? The new stock should not v be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. 11.08 %