Question

# You plan to invest in the Kish Hedge Fund, which has total capital of \$500 million...

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
1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)
1. ri = 9.8% + (10.1%)bi
2. ri = 6.0% + (8.2%)bi
3. ri = 7.2% + (7.4%)bi
4. ri = 6.0% + (10.1%)bi
5. ri = 9.8% + (8.2%)bi

-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 14%, and its estimated beta is 1.5. 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.

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%

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