Reference no: EM132485996

The Kish Investment Fund, in which you plan to invest some money, has total capital of $500 million invested in 5 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 weighted 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

Requirement: (please showing workings)

Question 1: What is the estimated equation for the Security Market Line (SML)? (Hint: First determine the expected market return.)

Question 2: Compute the fund's expected rate of return for the next period.