1. Suppose the market has experienced a combination of an increase in real interest rate and anticipated inflation that causes the risk-free rate to increase from 6% to 8%, but investors risk aversion remains constant (15 points)
2. What will happen to the market risk premium?
3. What effect does the increase in the risk-free rate have on the SML?
4. How does the SML reflect a positive change in the market risk premium?
5. What may cause a firms beta to change?
6. If the changes you noted in (iv) above lead to a higher or lower beta, what is the effect on the firms required return?