Question

a) Calculate the required return for an asset that has a beta of 1.5, given a risk-free rate of 3% and a market return of 10%

b) If investor have become more risk averse due to recent political risk events and the market return rises to 12%, what the required rate of return for the same asset?

c) Use your findings in part a to graph the initial security market lines (SML), and then use your findings in part b to graph ( on the same set of axes) the shift in the SML

Answer 1

Solution-

a) Beta=1.5

Risk free return=3%

Market return=10%

Required return= Rf+(Rm-Rf)beta

=3+(10-3)1.5

=13.5%

b)if market return rises to 12% then required return =3+(12-3)1.5

=16.5%