Stock A has a beta of 1.2 and a required rate of return of 7%. The return on the overall stock market is 6%.

1. Use the CAPM formula to determine the risk-free rate, r_RF.
2. Assume the overall market return increases from 6% to 8%. Stock As beta and the risk-free rate remain unchanged. What would Stock As new required return be after the change in the overall market return?
3. The overall market return remains at 8%. An investor constructs a two-stock portfolio that has $3 million invested in Stock A and $2 million invested in Stock B. Stock B beta is twice as high as the beta of the overall market. What is the required rate of return on the investors two-stock portfolio?

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