# Required Rate of Return

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.

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#### Solution Preview

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 = ...

#### Solution Summary

The solution explains how to calculate the required rate of return on market and stock.

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