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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	0.8
B	120 million	2.4
C	80 million	4.3
D	80 million	1.0
E	60 million	3.6

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	Market Return
0.1	(5%)
0.2	9
0.4	11
0.2	13
0.1	15

1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
   1. r_i = 1.6% + (6.9%)b_i
   2. r_i = 4.0% + (6.3%)b_i
   3. r_i = 7.0% + (5.8%)b_i
   4. r_i = 7.0% + (6.3%)b_i
   5. r_i = 4.0% + (5.8%)b_i
   -Select-IIIIIIIVVItem 1
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 15%, and its estimated beta is 1.4. Should Kish invest in the new company? The new stock -Select-should notshouldItem 3 be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. %