The risk-free rate is 3%, and the market risk premium rM rRF is 4%. Stock A has a beta of 1.2, and Stock B has a beta of 0.8.

a. What is the required rate of return on each stock?

b. Assume that investors become less willing to take on risk (i.e., they become more risk averse), so the market risk premium rises from 4% to 6%. Assume that the risk-free rate remains constant. What effect will this have on the required rates of return on the two stocks?