1. If a stock's expected return plots on or above the SML, then the stock's return is (A)_________ to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is -_(B)_______to compensate the investor for risk.

A. inefficient or sufficient

B. Inefficient or sufficient

2. You are given the following information for Wine and Cork Enterprises (WCE): rRF = 4%; rM = 7%; RPM = 3%, and beta = 1.1

A. What is WCE's required rate of return?

B. If inflation increases by 1% but there is no change in investors' market risk premium, what is WCE's required rate of return now?

C. Assume now that there is no change in inflation, but market risk premium increases by 2%. What is WCE's required rate of return now?

D. If inflation increases by 1% and market risk premium increases by 2%, what is WCE's required rate of return now?