4--Consider again the SML given by Equation : Kj=6+8.2Bj and shown in

Assume that the risk-free rate (rf) of 6 percent is based on

an expected inflation premium of 4 percent. Suppose expected inflation

increases by three percentage points to 7 percent.

a. Write an equation for the SML given the increase in the expected (The formula for plotting the SML is requiredreturn = risk-free rate of return + beta (market return - risk-free rate of return).

inflation premium if all other factors remain constant.

b. Redraw the SML based on the new expected inflation premium.

c. Determine the required rate of return (kj) on Amazon.com common

stock before and after the expected increase in inflation. See data

for the appropriate beta.

Company Value Line Beta

Amazon1.05

American Electric Power0.70

American States Water0.70

Apple0.95