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 2.2 D 80 million 1.0 E 60 million 1.7 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 -25% 0.2 0 0.4 12 0.2 29 0.1 51 1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) Select one (1) of the answers below. ri = 2.2% + (10.7%)bi ri = 4.0% + (9.2%)bi ri = 2.5% + (10.4%)bi ri = 4.0% + (10.7%)bi ri = 2.2% + (9.2%)bi Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. ? % 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 [(select one) should not or should] be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. ? %
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 2.2 D 80 million 1.0 E 60 million 1.7 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 -25% 0.2 0 0.4 12 0.2 29 0.1 51 1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) Select one (1) of the answers below. ri = 2.2% + (10.7%)bi ri = 4.0% + (9.2%)bi ri = 2.5% + (10.4%)bi ri = 4.0% + (10.7%)bi ri = 2.2% + (9.2%)bi Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. ? % 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 [(select one) should not or should] be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. ? %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 | 2.2 |
| D | 80 million | 1.0 |
| E | 60 million | 1.7 |
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 | -25% |
| 0.2 | 0 |
| 0.4 | 12 |
| 0.2 | 29 |
| 0.1 | 51 |
- 1. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) Select one (1) of the answers below.
-
- ri = 2.2% + (10.7%)bi
- ri = 4.0% + (9.2%)bi
- ri = 2.5% + (10.4%)bi
- ri = 4.0% + (10.7%)bi
- ri = 2.2% + (9.2%)bi
- Calculate Kish's required
rate of return . Do not round intermediate calculations. Round your answer to two decimal places.
? %
- 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 [(select one) should not or should] be purchased.
At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places.
? %
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