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2-3 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?

2-4 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?

2-7 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?

2-9 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
_______________________________________________

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?

#### Solution Preview

2-3 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?

rs = rf + (rm - rf)b where rs is the stock's required rate of return
rm is the market required rate of return
rf is the risk free rate
b is the beta

Please note that (rm - rf) is equal to the market risk premium, and rf is equal to real inflation-free rate of return or Treasury bill rate

rs = 0.06 + (0.06)1.2
rs = 0.132 or 13.20%

If rf is equal to 0.06, then rm will be equal to 0.12.

2-4 Assume that the risk-free rate is 6% and the expected rate ...

#### Solution Summary

This solution is comprised of a detailed explanation and calculation to answer the finance questions.

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