Question

5. You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Stock Investment Beta А $160 million 0.5 B 120 million 1.2 с 80 million 1.8 D 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 that following probability distribution for future market returns is realistic: Probability Market Return 0.1 -28% 0.2 0 0.4 12 0.2 30 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. 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 0.1 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? 6. Stock A has the following probability distribution of expected returns. What is Stock A's expected rate of return and standard deviation? Probability Rate of Return -12% 0.1 0.2 0.4 0.2 0 5 8 22 0.1

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Answer 1

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C w ? ENG 02:14 30-07-2020 99+ 32 Х L1072 F G Н - - L M CALCULATION OF BETA INVESTMENT K PORTFOLIO BETA Q*R STOCK WEIGHTS BETA Р R 1051 1052 1053 1054 1055 1056 A 160 0.5 0.1600 B 120 1.2 Q 0.3200 0.2400 0.1600 0.1600 0.1200 0.2880 0.2880 C 80 1.8 D 80 1 0.1600 0.1920 E 60 1.6 500 PORTFOLIO BETA = 1.0880 1057 1058 1059 1060 1061 1062 1063 1064 1065 1066 1067 1068 1069 Rf = 4% CALCULATION OF EXPECTED MARKET RETURN P R P*R prob RETURN (R) EXPECTED RETURN 0.1 -28% -2.80% 0.2 0% 0.00% 0.4 12% 4.80% 0.2 30% 6.00% 0.1 50% 5.00% Rm = 13.00% 1070 a 1071 1072 1073 1074 EQUATION FOR SML EQUATION FOR SML EQUATION FOR SML = Rf + (Rm-Rf)b = 6% + (13%-6%)b = 6% + (7%)b KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +

C w ? ENG 02:14 30-07-2020 99+ 32 Х L1094 F G Н. K - - L M а 1071 1072 1073 1074 EQUATION FOR SML EQUATION FOR SML EQUATION FOR SML = Rf + (Rm-Rf)b = 6% + (13%-6%)b = 6% + (7%)b = 1075 1076 b KISH REQUIRED RATE OF RETURN REQUIRED RETURN = 6% + (7%)b REQUIRED RETURN = 6% + (7%)(1.088) REQUIRED RETURN 13.61600% ANSWER 13.62% 1077 1078 1079 1080 1081 1082 1083 1084 1085 1086 1087 1088 1089 с 15% EXPECTED RETURN = ESTIMATED BETA = 1.5 REQUIRED RETURN REQUIRED RETURN = 6% + (7%)(1.5) 16.500% AS EXPECTED RETURN <REQUIRED RETURN NEW STOCK SHOULD NOT BE PURCHASED 1090 1091 INDIFFERENT AT 1092 1093 1094 16.50% = 6% + (7%)(1.5) KE CAPM UTILITY, SHARPE, beta CoNvexity DGM beta VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +