6-6 Beta and expected return
Required Rate of Return
Suppose rRF = 5%, rM
= 10%, and rA = 12%.
a. Calculate Stock A’s beta.
b. If Stock A’s beta
were 2.0, then what would be A’s new required rate of return?

(6-1)
Portfolio Beta
An individual has $35,000 invested in a stock with a beta of
0.8 and another $40,000 invested in a stock with a beta of 1.4. Ifthese are the
only two investments in her portfolio, what is her portfolio’s
beta?

(6-2) Required Rate of Return
Assume that the risk-free rate is
6% and that the expected return on the market is 13%. What is therequired rate
of return on a stock that has a beta of 0.7?

6-7 Required Rate of
Return
Required Rate of Return
Suppose rRF = 9%, rM = 14%, and bi =
1.3.
a. What is ri, the required rate of return on Stock i?
b. Now suppose
rRF (1) increases to 10% or (2) decreases to 8%. The slope of theSML remains
constant. How would this affect rM and ri?
c. Now assume rRF remains at 9%
but rM (1) increases to 16% or (2) falls to 13%. The slope of theSML does not
remain constant. How would these changes affect ri?

ScholarMatic: Explanation & Answer

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