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 | 1.7 |
D | 80 million | 1.0 |
E | 60 million | 1.9 |
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 | -25 | % |
0.2 | 0 | |
0.4 | 14 | |
0.2 | 32 | |
0.1 | 49 |
-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.
%
1. Market Return = 0.1 * -25% + 0.4 * 14% + 0.2 * 32% + 0.1 * 49% = 14.4%
a. equation for the Security Market Line = Risk Free + Beta (Market return - risk free)
equation for the Security Market Line = 6% + Beta * 8.4% Option II
b. Kish's required rate of return = 6% + Beta * 8.4%
Kish's required rate of return = 6% + 1.30 * 8.4%
Kish's required rate of return = 16.92%
c. Expected Return of new stock = 6% + Beta * 8.4%
Expected Return of new stock = 6% + 1.50 * 8.4% = 18.60%
as the expected return is higher than portfolio's expected return .
The new stock should be purchased
d. at 18.60% the kish will be at indifferent
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