Problem 7-01 Assume that you expect the economy's rate of inflation to be 4 percent, giving an RFR of 6 percent and a market return (R) of 12 percent a. Choose the correct SML graph under these assumptions. The correct graph is -Select- Security market Line Rate of Return 0.22+ 0.16 0.14 0.121 SML 9N 0.061 0.041 0.027 Systematic Risk (Beta) Security market Line Rate of Return 0.22+ 0.18 Systematic Risk (Beta) Security market Line Rate of Retum 0.22 0.2 0.181 0.16 0.14 0.12 SMLa -0.17 0.00 RFR 0.064 0.04 0.021 Systematic Risk (Beta) Security market Line Rate of Return 0.22 0.2+ 0.18+ 0.167 0.147 0.12 - --- SML Systematic Risk (Beta) Security market Line Rate of Return 0.22 0.187 0.167 0.14 0.12 0.1 0.007 SMLa RFR 0.064 0.041 0.027 Systematic Risk (Beta) Security market Line Rate of Return 0.22 0.21 0.101 0.167 0.147 0.127 SML 014 D. Security market Line Rate of Return 0.22 0.27 0.11 0.08 RFR 0.00 0.041 0.02+ Systematic Risk (Beta) b. Subsequently, you expect the rate of inflation to increase from 4 percent to 6 percent. What effect would this have on the RFR and the RM? A change in risk-free rate, with other things being equal, would result in a new SML, which would intercept with the Select axis at the new risk-free rate and -Select- be parallel to the original SML Choose the correct SML graph. The correct graph is -Select- ity market Line Rate of Return 0.227 Chapter 07? Assignment - Asset Pricing Models Rate of Return - 0.22 0.2+ . ........ 0.187... 0.161 0.14 -- 0.12 - 0.11 0.08 0.06 0.04 0.021 OU Systematic Risk (Beta) Security market Line Rate of Return ally Choices 0.221 0.2 0.107 0.167 0.14 0.12 0.17 RTL 0.00 SMLD -- - SML RARE 0.06 sel Pricing Models 0.12 0.17 SMLD SML RFR RFR 0.00 0.06 0.044 0.027 Systematic Risk (Beta) Security market Line Rate of Return 0.22 0.2 0.18 0.124 0.00+ RFRD-R , 0.06 0.04+ 0.02 Systematic Risk (Beta) Security mark Rate of Return Systematic Risk (Beta) Security market Line Rate of Return SMLD T SML RFR FR 0.06 0.027 Systematic Risk (Beta) c. Choose an SML on the same graph to reflect an RFR of 8 percent and an RM of 16 perce The correct graph is -Select- Security market Line Rate of Return 0.22+ 0:21 0.10 L. Choose an SML on the same graph to reflect an RFR of 8 percent and an R of 16 percent The correct graph is Select Security market Line Rate of Return 1 1 1 niin 1 I Oo oo OOOO stematic Risk (Beta) Rate of Return! 0.22+ 0.2 0.107 0.16. 3 0.140 u Sach this course Chapter 077 Assignment - Asset Pricing Models Rate of Return ! oooo SS BONN 58 i SMLC SMLB i SMLA Systematic Risk (Beta) Security SMLC Rate of Return 0.22 0.27 0.187 0.16 0.141 0.127 -0.17 RR 0.00 RARDER 0.00 0.044 SMLD SML lungen - Aset Pricing Models 0.021 Systematic Risk (Beta) Rate of Return 0.221 0.100 SMLC 999 SMLL RFR 01 RFREER 0.05 0.04 Systematic Risk (Beta) How does this SML differ from that derived in Part b? Round your answer to two decimal places. New SML will have an intercept at and a select slope so it Select 8 be parallel to SML Grade It Now Save & Condime Continue without saving
