a.
To determine: The equation of the security market line.
Security Market Line:
The security market line is a line which shows the relationship between the risk which is measured by beta and the required return rate, which is for the individual securities.
b.
To determine: The required
The Required Rate of Return:
The required rate of return is the rate which should be minimum earned on an investment to keep that investment running in the market. When the required return is earned only then the users and the companies will invest in that particular investment.
c.
To determine: The decision of the new investment in the new company and the expected rate of return.
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Chapter 8 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
- 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 0.7 B 120 million 1.5 C 80 million 2.2 D E 80 million 60 million 1.0 1.4 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 -28% 0.2 0 0.4 13 0.2 32 0.1 48 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. n=1.5% + (11.5%) bi II. n = 4.0% + (10.9%)bi III. = 5.5% + (9.6%)bi -Select- IV. n = 5.5% + (10.9%) bi V. n 4.0% + (9.6%) bi b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position…arrow_forwardYou 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 В 120 million 1.2 C 80 million 1.9 80 million 1.0 E 60 million 1.4 Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 -29 % 0.2 0.4 13 0.2 28 0.1 48 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. ri = 1.0% + (9.7%)b¡ II. ri = 1.0% + (9.4%)b¡ III. ri = 3.0% + (9.7%)bi IV. ri = 5.9% + (11.6%)b¡ V. ri = 3.0% + (9.4%)b¡ -Select- b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a…arrow_forwardYou 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 (1)What is the equation for the Security Market Line (SML)? (Hint: First, determine the expected market return.) (2)Calculate Kish’s required rate of return. (3)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…arrow_forward
- 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 В 120 million 1.5 80 million 1.9 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 4%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 -29 % 0.2 0.4 12 0.2 29 0.1 47 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) I. ri = 4.0% + (7.5%)bj II. ri = 5.8% + (8.4%)b¡ III. ri = 5.8% + (7.5%)b¡ IV. ri = 4.0% + (8.4%)b¡ V. ri = 3.2% + (10.4%)b¡ -Select- + b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a…arrow_forwardou 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 1.5 C 80 million 1.8 D 80 million 1.0 E 60 million 1.4 Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-free rate is 3%, and you believe the following probability distribution for future market returns is realistic: Probability Market Return 0.1 -25 % 0.2 0 0.4 13 0.2 30 0.1 51 What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) ri = 0.8% + (10.8%)bi ri = 0.8% + (12.3%)bi ri = 3.0% + (10.8%)bi ri = 2.3% + (10.2%)bi ri = 3.0% + (12.3%)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…arrow_forwardYou plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Stock A B C D E 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: Investment $160 million 120 million 80 million 80 million 60 million Probability 0.1 0.2 0.4 0.2 0.1 a. What is the equation for the Security Market Line (SML)? (Hint: First determine the expected market return.) Stock's Beta Coefficient 0.4 1.0 1.8 1.0 1.3 -Select- ◆ Market Return I. r₁ = 3.8% + (10.1%) bi II. r = 4.0% + (9.6%)bi III. r₁ = 5.9% + (9.3%)bi IV. r₁ = 5.9% + (9.6%)bi V. r₁ = 4.0% + (9.3%)bi -24% 0 11 30 53 b. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a…arrow_forward
- 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 A 160 million 0.5 B 120 million 1.2 C 80 million 1.8 D 80 millon 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)? (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 lake 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…arrow_forwardYou plan to invest in the Kish Hedge Fund, which has totalcapital of $500 million invested in five stocks given below: Kish’s beta coefficient can be found as a weighted average of its stocks’ betas. The risk-freerate is 6%, and you believe the following probability distribution for future market returnsis realistic:Probability Market Return0.1 228%0.2 00.4 120.2 300.1 50a. What is the equation for the security market line (SML)? (Hint: First, determine theexpected market return.)b. Calculate Kish’s required rate of return.c. Suppose Rick Kish, the president, receives a proposal from a company seeking newcapital. The amount needed to take a position in the stock is $50 million, it has anexpected return of 15%, and its estimated beta is 1.5. Should Kish invest in the newcompany? At what expected rate of return should Kish be indifferent to purchasingthe stock?arrow_forwardb. Calculate Kish's required rate of return. Do not round intermediate calculations. Round your answer to two decimal places. % 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 14%, and its estimated beta is 1.4. Should Kish invest in the new company? The new stock -Select- ✓be purchased. At what expected rate of return should Kish be indifferent to purchasing the stock? Round your answer to two decimal places. %arrow_forward
- You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Stock Investment Beta A $218,000 1.50 B 327,000 0.60 C 545,000 1.18 Calculate the beta of the portfolio and use the Capital Asset Pricing Model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 17 percent and that the risk-free rate is 8 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.) Beta of the portfolio Expected rate of return %arrow_forwardAs an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): Fund T Fund U Forecasted Return 9.0% 10.0 CAPM Beta 1.20 0.80 a) If the risk-free rate is 3.9 % and the expected market risk premium is 6.1%, calculate the expected return for each mutual fund according to the CAPM. b) Using the estimated expected returns from Part a along with your own return forecasts, explain whether Fund T and Fund U are currently priced to fall directly on the security market line (SML), above the SML, or below the SML. Are Funds T and U overvalued, undervalued, or properly valued?arrow_forwardYou have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Stock Investment Beta A $222,000 1.41 B 333,000 0.53 C 555,000 1.30 Calculate the beta of the portfolio and use the Capital Asset Pricing Model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 12 percent and that the risk-free rate is 7 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.) Beta of the portfolio enter the beta rounded to 3 decimal places Expected rate of return enter percentages rounded to 2 decimal places %arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT