Subject: FInancial strategy & policy Question # 2 (part ii) ii) 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                             0.5 B                      120 million                               1.2 C                      80 million                                 1.8 D                     80 million                                 1.0 E                      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                   28% 0.2                   0 0.4                   12 0.2                   30 0.1                   50 a) What is the equation for the Security Market Line (SML)? b) Calculate Kish’s required rate of return.

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
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Subject: FInancial strategy & policy

Question # 2 (part ii)

ii) 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                             0.5

B                      120 million                               1.2

C                      80 million                                 1.8

D                     80 million                                 1.0

E                      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                   28%

0.2                   0

0.4                   12

0.2                   30

0.1                   50

a) What is the equation for the Security Market Line (SML)?

b) Calculate Kish’s required rate of return.

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