The kish investment fund in which you plan to invest some money,has total capital of $500 million invested in five stocks:

stock Investment Stock's Beta Coefficient

a $160 million 0.5

b 120 million 2.0

c 80 million 4.0

d 80 million 1.0

e 60 million 3.0

The beta coefficient for a fund like Kish Investment can be found as a weghted average of the fund's investments. The current risk-free rate is 6%,whereas market returns have the following estimated probability distribution for the next period.

Probability Market Return

0.1 7%

0.2 9%

0.4 11%

0.2 13%

0.1 15%

a) What is the estimated equation of the Security Market Line (SML).

b) Draw a properly labeled graph of the line.

c)Compute the fund's required rate of return for the next period.

d) Suppose Bridget Nelson, the president, receives a proposal for a new stock. The investment needed to take a position in the stock is $50 million, it will have an expected return of 15%,and its estimated beta coeficient is 2.0.Should the new stock be purchased?At what expected rate of return should the fund be indifferent to purchasing the stock?

stock Investment Stock's Beta Coefficient

a $160 million 0.5

b 120 million 2.0

c 80 million 4.0

d 80 million 1.0

e 60 million 3.0

The beta coefficient for a fund like Kish Investment can be found as a weghted average of the fund's investments. The current risk-free rate is 6%,whereas market returns have the following estimated probability distribution for the next period.

Probability Market Return

0.1 7%

0.2 9%

0.4 11%

0.2 13%

0.1 15%

a) What is the estimated equation of the Security Market Line (SML).

b) Draw a properly labeled graph of the line.

c)Compute the fund's required rate of return for the next period.

d) Suppose Bridget Nelson, the president, receives a proposal for a new stock. The investment needed to take a position in the stock is $50 million, it will have an expected return of 15%,and its estimated beta coeficient is 2.0.Should the new stock be purchased?At what expected rate of return should the fund be indifferent to purchasing the stock?

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