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 | 0.7 |
B | 120 million | 1.1 |
C | 80 million | 1.8 |
D | 80 million | 1.0 |
E | 60 million | 1.8 |
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 | -27 | % |
0.2 | 0 | |
0.4 | 14 | |
0.2 | 29 | |
0.1 | 55 |
-Select-IIIIIIIVVItem 1
%
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.
Portfolio beta is equal to weighted average beta
= 0.7*160/500 + 1.1*120/500 + 1.8*80/500 + 1*80/500 + 1.8*60/500
= 1.152
Expected Market return = 0.1*-27% + 0.2*0% + 0.4*14% + 0.2*29% + 0.1*55%
= 14.2%
SML Equation is : Stock return = Risk free rate + beta*(Market return – risk free rate)
= 6% + b*(8.2%)
i.e. II
b.Required rate of return = 6% + 1.152*8.2%
= 15.4464% i.e. 15.45%
c.Rate of return required = 6% + 1.5*8.2%
= 18.3%
SHOULD NOT be purchased as return is lower
Indifference expected rate of return = 18.3%
Get Answers For Free
Most questions answered within 1 hours.