The McAlhany Investment Fund has total capital of $500 million invested in five stocks:

The current risk-free rate is 8 percent. Market returns have the following estimated probability distribution for the next period:
Probability Market Return
0.1 ......... 10%
0.2 ......... 12%
0.4 ......... 13%
0.2 ......... 16%
0.1 ......... 17%
a. Compute the expected return for the market.
b. Compute the beta coefficient for the investment fund. (Remember, this problem involves a portfolio.)
c. What is the estimated equation for the Security Market Line?
d. Compute the fund’s required rate of return for the next period.
e. Suppose John McAlhany, the president, receives a proposal for a new stock. The investment needed to take a position in the stock is $50 million, it will have an expected return of 18 percent, and its estimated beta coefficient is 2.0. Should the firm purchase the new stock? At what expected rate of return should McAlhany be indifferent to purchasing thestock?

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Stock Investment Stock's Beta Coefficient $160 million 120 million 80 million 80 mlion 60 million 0.5 2.0 4.0 1.0 3.0