Problem: Security Market Line
You plan to invest in Kish Hedge fund, which has total capital of $500 million invested in 5 stocks:
Sock 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
a.What is the equation for Security Market Line (SML)? (Hint : First determine the expected market return)
b.Calculate Kish's required rate of return.
c.Suppose Rick Fish, 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 Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasing the stock?
The response addresses the queries posted in a well explained excel file.