Currently, the risk-free interest rate (RF) is 4% and the required market return (rm)is 12 %. You consider to buy a stock with a beta () of 1.5 and you expect to earn 15% annual rate of return from this stock.

(1) Use the Capital Asset Pricing Model (CAPM) to find the required return on this stock

(2) Base on your answer from part (1), would you buy this stock? Why or why not?

3) Draw the Security Market Line (SML) using the data above, and determine intercept and slope of the SML.

2. Microsoft Stock has a beta of 1.20.

(1) If the market return increased by 10%, what impact would this change be expected to have on Microsoft stocks return?

(2) If the market return decreased by 20%, what impact would this change be expected to have on Microsoft stocks return?

(3) Would Microsoft stock be considered more or less risky than the marke