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Estimated equation for the security market line

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Reference no: EM132540508

Morden Company Investment Fund has a total investment of $400 million in five stocks:

Stock Investment Beta

A $120 million 0.5

B $100 million 2.0

C XX 4.0

D $80 million 1.0

E $40 million 3.0

The risk-free rate is 7%, and the market return has the following probability distribution: Probability Market Return

0.1 8%

0.2 10%

0.4 12%

0.2 14%

0.1 16%

a. What is the estimated equation for the security market line (SML)?

b. Compute the required rate of return on the fund.

c. Suppose the management receives a proposal for a new stock. The investment needed to take a position in the stock is $50 million; it will have an expected return of 16%; and its estimated beta coefficient is 2.5. Should the new stock be purchased? At what expected rate of return would management be indifferent to purchasing the stock?

Reference no: EM132540508

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