What is the equation for the Security Market Line
Question: 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 $160 million 0.5 120 million 1.2 80 million 1.8 80 million 1.0 60 million 1.6 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 0.2 0.4 12 0.2 30 0.1 50 a. What is the equation for the Security Market Line (SML)? (Hint: First, determine the expected market return.) b. Calculate Kish’s required rate of return. Learning. Rights Reserved May not be copied, scanned or duplicated in whole erin part. Due to electronic rights. some third party cornen may be suppressed from the cBook andlar eCapoerisl that any suppressed content does not materially affectthe overall loaming experience. Cengage Learming reserves the right remove additional content at any time if subsequent rights mestrictions mq it. Risk and Rates of Return 297 c. 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 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock?
