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

Stock A: Investment $160 Million Stock's Beta Coefficient 0.5
Stock B: Investment $120 Million Stock's Beta Coefficient 2.0
Stock C: Investment $ 80 Million Stock's Beta Coefficient 4.0
Stock D: Investment $ 80 Million Stock's Beta Coefficient 1.0
Stock E: Investment $ 60 Million Stock's Beta Coefficient 3.0

The Current risk free rate is 8 percent. Market returns have thefollowing estimated probability distribution for the nextperiod:

Probability Market Return
0.1 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.
C. What is the estimated equation for the security marketline?
D. Compute the fund's required rate of return for the nextperiod
E. Suppose John McAlhany, the president, receives a proposal for anew stock. The investment needed to take a position in the stock is$50 million, it will have an expected return of 18%, and itsestimated beta coefficient is 2.0. Should the firm purchase the newstock? At what expected rate of return should McAlhany beindifferent to purchasing the stock?

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Keith Leannon
Keith LeannonLv2
30 Sep 2019

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