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Kish Hedge fund

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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
0.1 -28%
0.2 0
0.4 12%
0.2 30%
0.1 50%

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?

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Solution Summary

The response addresses the queries posted in a well explained excel file.

Solution provided by:
Ashish Sharma, MBA (IP)
Education
  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
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