You plan to invest in the Kish Hedge Fund, which has a total capital of $500 mil

Question

You plan to invest in the Kish Hedge Fund, which has a total capital of $500 million invested in five stocks:

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:

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 needed to take a position in the stock is $50 million, it has an expected return of 14%, 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? Round your answer to two decimal places.

Stock Investment Stock's Beta Coefficient A $160 million 0.4 B 120 million 2.3 C 80 million 3.9 D 80 million 1.0 E 60 million 3.0

Explanation / Answer

Answer )

The return of fund by use of CAPM (SML)

E(R)=Rf + (Rm-Rf)*Beta

Here , Rf = 4% , Beta = 1.824 (calculated below ) ,

Rm = = 0.1(-5%) + 0.2(10%) + 0.4(12%) + 0.2(14%) + 0.1(17%) = 10.8%

Beta of Fund

E(R) = 4+ 1.824 ( 10.8-4) = 16.4032 = 16.40 %

for evaluation of new investment projects :

E(R)=Rf + (Rm-Rf)*Beta

E(R) = 4 + (10.8-4)* 1.5 = 14.2 %

As the required expected rate of return ( 14.2%) is less than actual rate of return (14%) in the stock .

=> shouldn't invest in the stock

The expected rate of return that would make the fund indifferent to purchasing the
stock is 14.2%

Stock Investment Stock's Beta Coefficient Weight Beta * weight A $160 million 0.4 0.32 0.128 B 120 million 2.3 0.24 0.552 C 80 million 3.9 0.16 0.624 D 80 million 1 0.16 0.16 E 60 million 3 0.12 0.36 500 Beta(fund) 1.824

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