1.Joe Jones, Inc. has a beta of .85. The risk-free rate is 5% and the expected rate of return on the market portfolio is 10%.

a. Compute the required return for Joe Jones using the security market line (SML) equation.

b. What is "beta?" Under what rationale is beta an appropriate measure of risk.

2. A firm's return on assets (ROA) decreased during a year in which its net profit margin and its return on equity (ROE) increased. Explain what must have happened to the firm's asset turnover and equity multiplier.