Use the letter in front of the statement to answer the questions that follow. Re

Question

Use the letter in front of the statement to answer the questions that follow. Read all the options first The letter may be used to answer more than one question. It increases by 3% It decreases by 3% It increases, but not proportionately It decreases, but not proportionately No change, remains the same The SML shifts upward, but the slope remains constant The SML shifts downward, but the slope remains constant The SML pivots upward, and the slope becomes steeper The SML pivots downward, and the slope becomes flatter What would happen to the risk free rate, r_rf What would happen to the market rate, r_m What would happen to the required rate, r What would happen to the slope of the SML What would happen to the risk free rate, r_rf What would happen to the market rate, r_m What would happen to the required rate, r What would happen to the slope of the SML There are three investment opportunities to consider. The forecasted risk-free rate is 9%, and the expected market rate is 13%. What is the required rate of return, r. for each of the following scenarios. Assume investment A has a beta of.8 Assume investment B has a beta of 1.5 Assume investment C has a beta of 2.0 Which is the least risky investment? Which is the most risky investment?

Explanation / Answer

Answer:

Investment A required Return=Rf+beta(Erm-Rf)

=9%+0.8(13%-9%)

=12.2%

Investment B required Return=Rf+beta(Erm-Rf)

=9%+1.5(13%-9%)

=15%

Investment C required Return=Rf+beta(Erm-Rf)

=9%+2.0(13%-9%)

=17%

Least Risky=Investment A

More risky=Investment C

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