16. (The security market line) The pure rate of interest is 3%, investors demand a 5% inflation premium on long-term investments, and the risk premium for a stock with beta of 1 is 7%. ZZZ stock has a beta of 1.35.

a. What is the required rate of return from ZZZ stock?

b. Suppose investors increase their inflation premium

to 6%. What is the new required rate of return from

ZZZ stock?

c. Now suppose investors increase their risk pre-

mium for a stock with beta of 1 to 8% (the inflation

premium is still 5%). What is the new required rate

of return from ZZZ stock?

d. Now suppose investors decrease their estimate of

ZZZs beta to 1.25 (the inflation premium is still

5%, and the risk premium is still 7%). What is the

new required rate of return from ZZZ stock?