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A stock has a beta of 1.75, the market risk premium is 7.5 percent, and the risk-free rate is 3 percent. a. What must the

A stock has a beta of 1.75, the market risk premium is 7.5 percent, and the risk-free rate is 3 percent.

a. What must the expected return on this stock be?

b. Draw the Security Market Line (SML) -be sure to label all relevant points-

c. Suppose the risk free rate falls to 2%. What is the expected return on this stock? Redraw the SML. How has the shape of the curve changed?

d. Suppose the market risk premium is now 5.5 percent and the risk free rate is 4%. What is the expected return on his stock? Redraw the SML. How has the shape changed from the first graph you created?

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