7-11. SML Assume that the risk-free rate is 2%, the market risk premium is 5%, and the beta of two stocks A and B are 1.4 and 0.8, respectively a. Calculate both stocks required rates of return. Answer b. What would be the return on an average stock? Answer c. Explain the significance of a security with a 0 beta. What would be this security's required return? d. Assume that the economy worsens and that investors correspondingly revise their attitudes toward stocks. Would this change be better reflected in a shift in the market risk premium to 3.5% or 6,5%? e. Based on your answer to (d), what would be the new required return for stocks A and B? Would you expect stock prices for A and B to fall or rise? Answer f. Ignoring (d) and (e) above, assume that inflationary expectations were revised upward by 0.5%. What would be the change to required returns for stocks A and B? Would their prices fall or rise? Answer +