Question

 Assume that the​ risk-free rate,

Upper R Subscript Upper FRF​,

is currently

7​%,

the market​ return,

r Subscript mrm​,

is

15%​,

and asset A has a​ beta,

b Subscript Upper AbA​,

of

0.87.

Assume that as a result of recent economic​ events, inflationary expectations have declined by

11​%,

lowering

Upper R Subscript Upper FRF

and

r Subscript mrm

to

6​%

and

14​%,

respectively. Which of the following graphs represents the new SML and shows the new required return for asset​ A?

Answer 1

We see that the new required return is given as equal to=6%+0.87*(14%-6%)=12.9600%