1) Suppose r_RF = 6%, r_M = 12%, and b_k=1.75.

a) Find the required rate of return on stock k (r_k)

b) If r_RF increases to 8% and the slope of the SML remains constant. How would this affect r_M and r_k?

c) If r_RF remains at 6% but r_M falls to 9%. The slope of the SML does not remain constant. How would

these changes affect r_k?

2) Don is managing a $10 million portfolio that has a beta of 1.4 and a required rate of return of 15.2%. The current risk-free rate is 4%. Assume that Tom receives another $5 million. If Don invests the money in a stock with a beta of 0.85, what will be the required return on Dons 15 million portfolio? (Hint: find the market risk premium (r_M r_RF) first using the information of the original portfolio, next find the new portfolio beta and then the required rate of return).

Show all work please! :)