Compute the expected return for the market

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Reference no: EM13287973

The McAlhany Investment Fund has total capital of $500 million invested in five stocks:

The Stock, Investment Amt, And Stocks Beta Coefficient are as follows:Stock A 160 Million 0.5; Stock B 120 Million 2.0; Stock C 80 Million 4.0; Stock D 80 Million 1.0; Stock E 60 Million 3.0

The current risk free rate is 8%. Market returns have the following estimated probability distribution for the next period: Prob 0.1 Market Return 10%; 0.2 12%; 0.4 13%; 0.2 16%; 0.1 17%

A. Compute the expected return for the market
B. Compute the beta coefficient for the investment fund (Remember this involves a portfoliio)
C. What is the estimated equation for the security market line?
D. Compute the funds required rate of return for the next period.
E. Suppose John McAlhany recieves a proposal for a new stock. The investment needed to take a postion in the stock is $50 million-the expected return is 18%, estimated beta coefficient is 2.0. Should the firm purchase the new stock? At what expected rate of return should McAlhany be indifferent to purchasing the stock?

Reference no: EM13287973

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