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    Required Rate of Return

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    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

    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.