1) AA Corporation's stock has a beta of 0.9. The risk-free rate is 2%, and the expected return on the market is 9%. What is the required rate of return on AA's stock? Do not round intermediate calculations. Round your answer to one decimal place.

2) Suppose r_RF = 6%, r_M = 11%, and r_A = 9%.

Calculate Stock A's beta. Round your answer to one decimal place. Answer: 0.6

If Stock A's beta were 0.9, then what would be A's new required rate of return? Round your answer to one decimal place.

3) As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose r_RF = 6%, r_M = 10%, and b_UT = 1.9.

Under current conditions, what is r_UT, the required rate of return on UT Stock? Round your answer to one decimal place. ANSWER: 13.6%

Now suppose r_RF increases to 7%. The slope of the SML remains constant. How would this affect r_M and r_UT?

I. r_M will increase by 1 percentage point and r_UT will remain the same. II. Both r_M and r_UT will decrease by 1 percentage point. III. Both r_M and r_UT will remain the same. IV. Both r_M and r_UT will increase by 1 percentage point. V. r_M will remain the same and r_UT will increase by 1 percentage point.

Now suppose r_RF decreases to 5%. The slope of the SML remains constant. How would this affect r_M and r_UT?

I. Both r_M and r_UT will decrease by 1 percentage point. II. r_M will decrease by 1 percentage point and r_UT will remain the same. III. r_M will remain the same and r_UT will decrease by 1 percentage point. IV. Both r_M and r_UT will increase by 1 percentage point. V. Both r_M and r_UT will remain the same.

Now assume r_RF remains at 6% but r_M increases to 12%. The slope of the SML does not remain constant. How would these changes affect r_UT?

I. r_UT will increase by 3.8 percentage point. II. r_UT will remain the same. III. r_UT will decrease by 3.8 percentage point.