8 Required Rate of Return As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change Suppose r RF 5 , r M 12 , and b UT 1 7 Under current conditions, what is r UT , the required rate of return on UT Stock Round your answer to one decimal place Now suppose r RF increases to 6 The slope of the SML remains constant How would this affect r M and r UT I Both r M and r UT will decrease by 1 percentage point II Both r M and r UT will remain the same III Both r M and r UT will increase by 1 percentage point IV r M will remain the same and r UT will increase by 1 percentage point V r M will increase by 1 percentage point and r UT will remain the same Select IIIIIIIVVItem 2 Now suppose r RF decreases to 4 The slope of the SML remains constant How would this affect r M and r UT I Both r M and r UT will decrease by 1 percentage point II r M will decrease by 1 percentage point and r UT will remain the same III r M will remain the same and r UT will decrease by 1 percentage point IV Both r M and r UT will increase by 1 percentage point V Both r M and r UT will remain the same Select IIIIIIIVVItem 3 Now assume r RF remains at 5 but r M increases to 14 The slope of the SML does not remain constant How would these changes affect r UT I r UT will decrease by 3 4 percentage point II r UT will remain the same III r UT will increase by 3 4 percentage point Select IIIIIIItem 4 Now assume r RF remains at 5 but r M falls to 11 The slope of the SML does not remain constant How would these changes affect r UT I r UT will remain the same II r UT will decrease by 1 7 percentage point III r UT will increase by 1 7 percentage point 9 Portfolio Beta Your retirement fund consists of a $5,000 investment in each of 18 different common stocks The portfolio's beta is 1 20 Suppose you sell one of the stocks with a beta of 0 6 for $5,000 and use the proceeds to buy another stock whose beta is 1 6 Calculate your portfolio's new beta Do not round intermediate calculations Round your answer to two decimal places 10 Portfolio Required Return Suppose you manage a $4 million fund that consists of four stocks with the following investments Stock Investment Beta A $400,000 1 50 B 800,000 0 50 C 1,000,000 1 25 D 1,800,000 0 75 If the market's required rate of return is 15 and the risk free rate is 7 , what is the fund's required rate of return Do not round intermediate calculations Round your answer to two decimal places

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8. Required Rate of Return As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as

8. Required Rate of Return

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose r_RF = 5%, r_M = 12%, and b_UT = 1.7.

Under current conditions, what is r_UT, the required rate of return on UT Stock? Round your answer to one decimal place.

Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_UT?

I. Both r_M and r_UT will decrease by 1 percentage point. II.Both r_M and r_UT will remain the same. III. Both r_M and r_UT will increase by 1 percentage point. IV. r_M will remain the same and r_UT will increase by 1 percentage point. V. r_M will increase by 1 percentage point and r_UT will remain the same.

-Select-IIIIIIIVVItem 2

Now suppose r_RF decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_UT?

I. Both r_M and r_UT will decrease by 1 percentage point. II. r_M will decrease by 1 percentage point and r_UT will remain the same. III. r_M will remain the same and r_UT will decrease by 1 percentage point. IV. Both r_M and r_UT will increase by 1 percentage point. V. Both r_M and r_UT will remain the same.

-Select-IIIIIIIVVItem 3

Now assume r_RF remains at 5% but r_M increases to 14%. The slope of the SML does not remain constant. How would these changes affect r_UT?

I. r_UT will decrease by 3.4 percentage point. II. r_UT will remain the same. III. r_UT will increase by 3.4 percentage point.

-Select-IIIIIIItem 4

Now assume r_RF remains at 5% but r_M falls to 11%. The slope of the SML does not remain constant. How would these changes affect r_UT?

I. r_UT will remain the same. II. r_UT will decrease by 1.7 percentage point. III. r_UT will increase by 1.7 percentage point.

9. Portfolio Beta

Your retirement fund consists of a $5,000 investment in each of 18 different common stocks. The portfolio's beta is 1.20. Suppose you sell one of the stocks with a beta of 0.6 for $5,000 and use the proceeds to buy another stock whose beta is 1.6. Calculate your portfolio's new beta. Do not round intermediate calculations. Round your answer to two decimal places.

10. Portfolio Required Return

Suppose you manage a $4 million fund that consists of four stocks with the following investments:

Stock	Investment	Beta
A	$400,000	1.50
B	800,000	-0.50
C	1,000,000	1.25
D	1,800,000	0.75

If the market's required rate of return is 15% and the risk-free rate is 7%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.