Question

2. The required return of a stock, r, is estimated to be ist and the expected return on the market portfolio is 9%. Please calculate the stock's The risk free rate is 32s% beta. (30 points) As you know, the Security Market Line (SML) is not static. There could be all kinds of changes to this, but at our level, we typically assume that there are 2 specific kinds of changes to the SML. 1. Change due to change in inflationary expectation in the market, and 2. Change due to change in risk aversion in the market. Please discuss these, with diagrams of the SML in each case to show how the line changes. 3. (30 points)

Answer 1

Ans 2) 1.35

Expected Return =	Risk free Return + (Market Return - Risk free return)* Beta
11% =	3.25% + (9% - 3.25%)*Beta
7.75% =	5.75% * Beta
Beta =	7.75% / 5.75%
Beta =	1.35

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