Risk and Return: Security Market Line

The security market line $($SML$)$ is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities$.$ The SML equation is given below:

Required return on Stock $=$ Risk$-$free return $+($Market risk premium$)($Stock$\text{'}$s beta$)$

If a stock's expected return plots on or above the SML$,$ then the stock's return is

$]$ to compensate the investor for risk. If a stock's expected return plots below the SML$,$ the stock's return is

to compensate the

investor for risk.

Quantitative Problem: You are given the following information for Wine and Cork Enterprises $($WCE$)$:

$rRF=4\%$;$M=7\%$;$RPM=3\%,$ and beta $=1\mathrm{.}2$

What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

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If inflation increases by $1\%$ and market risk premium increases by $2\%,$ what is WCE's required rate of return now? Do not round intermediate calculations. Round your answer to two decimal places.

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