Suppose the following:
Risk Free Rate of Return = 9%
Required Rate of Return on a Market Portfolio = 14%
Beta = 1.3
Suppose the risk free rate of return (1) increases to 10 percent or (2) decreases to 8 percent. The slope of the SML remains constant. How would this affect the required rate of return on a market portfolio and the required rate of return on a stock?
Answers (1) rM = 15% ; ri = 16.5%
(2) rM = 13% ; ri = 14.5%
I do not understand how to arrive at the answers.© BrainMass Inc. brainmass.com June 3, 2020, 7:11 pm ad1c9bdddf
The slope of the SML is (Market Return - Risk free rate)
The exisiting slope of the SML is 14%-9%=5%
The required return on the stock = ...
The solution explains how to calculate the required rate of return on market and stock.