Question 1: Assume that a risk-free rate is 6% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock that has a beta of 1.2?
Question 2: Assume that the risk-free rate is 6% and the expected rate of return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?
Question 3: Suppose rRF =14%, and b1 = 1.3.
a. What is the ri, the required rate of return on Stock i?
b. Now suppose rRF (1) increases to 10 per cent or (2) decreases to 8 percent. The slope of the SML remains constant How would this affect rM and ri??
c. Now assume rRF remains at 9 percent but rM (1) increases to 16 percent or (2) falls to 13 percent. The slope of the SML does not remain constant. How would these affect ri?
Question 4: Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:
Stock Investments Beta
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A S 400,000 1.5
B 600,000 (0.50)
C 1,000,000 1.25
D 2,000,000 0.75
If the market required rate of return is 14 percent and the risk-free rate is 6%, what is the fund's required rate of return?