Calculate "r" the required rate of return for each of the following.
a. Assume beta is 1.3 for this and the next two problems, the risk-free rate is 6.5%, and market risk is 10.5%.
b. Now assume the risk-free rate increases to 8% because inflation is expected to increase next year.
What will happen to the slope of the SML? Steeper, flatter, or remains constant? Pivots up, pivots down, shifts up, or shifts down?
c. Now assume the investors are more averse to risk in the market and require an additional 1%. The risk-free rat eis 6.5%.
d. What will happen to the slope of the SML? Steeper, flatter, or remains constant? Pivots up, pivots down, shifts up, or shifts down?