Question
Assume that the risk-free rate, Upper R Subscript Upper F, is currently 9%, the market return, r Subscript m, is 13 %, and asset A
Assume that the risk-free rate, Upper R Subscript Upper F, is currently 9%, the market return, r Subscript m, is 13 %, and asset A has a beta, b Subscript Upper A, of 1.39.
a.Use CAPM to estimate the required return, r Subscript Upper A, on asset A. Which of the following graphs represents the security market line (SML) and the required return for asset A?
b.Assume that as a result of recent economic events, inflationary expectations have declined by 2%, lowering Upper R Subscript Upper F and r Subscript m to 7% and 11%, respectively. Which of the following graphs represents the new SML and shows the new required return for asset A?
c.Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 1 %, to 14%. Ignoring the shift in part b, which of the following graphs shows the new SML and the new required return for asset A?
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