1. CAPM AND REQUIRED RETURN

Beale Manufacturing Company has a beta of 1, and Foley Industries has a beta of 0.95. The required return on an index fund that holds the entire stock market is 8%. The risk-free rate of interest is 5.25%. By how much does Beale's required return exceed Foley's required return? Round your answer to two decimal places.

2. Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 5% rate of inflation in the future. The real risk-free rate is 3%, and the market risk premium is 7.5%. Mudd has a beta of 1.7, and its realized rate of return has averaged 15% over the past 5 years. Round your answer to two decimal places.

3. Suppose rRF = 7%, rM = 13%, and bi = 1.4.

What is ri, the required rate of return on Stock i? Round your answer to two decimal places. %

a. Now suppose rRF increases to 8%. The slope of the SML remains constant. How would this affect rM and ri?

-rM will increase by 1% and ri will remain the same.

-Both rM and ri will decrease by 1%.

-Both rM and ri will remain the same.

-Both rM and ri will increase by 1%.

-rM will remain the same and ri will increase by 1%.

b. Now suppose rRF decreases to 6%. The slope of the SML remains constant. How would this affect rM and ri?

-Both rM and ri will decrease by 1%.

-rM will decrease by 1% and ri will remain the same.

-rM will remain the same and ri will decrease by 1%.

-Both rM and ri will increase by 1%.

-Both rM and ri will remain the same.

c.

1. Now assume that rRF remains at 7%, but rM increases to 14%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.

The new ri will be %.

2. Now assume that rRF remains at 7%, but rM falls to 12%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.

The new ri will be %.