As an equity analyst you are concerned with what will happen to the requiredreturn to Universal Toddler’s stock as market conditions change. SupposerRF 5 5%, rM 5 12%, and bUT 5 1.4.a. Under current conditions, what is rUT, the required rate of return on UTstock?b. Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope ofthe SML remains constant. How would this affect rM and rUT?c. Now assume rRF remains at 5% but rM (1) increases to 14% or (2) falls to11%. The slope of the SML does not remain constant. How would thesechanges affect rUT?
As an equity analyst you are concerned with what will happen to the requiredreturn to Universal Toddler’s stock as market conditions change. SupposerRF 5 5%, rM 5 12%, and bUT 5 1.4.a. Under current conditions, what is rUT, the required rate of return on UTstock?b. Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope ofthe SML remains constant. How would this affect rM and rUT?c. Now assume rRF remains at 5% but rM (1) increases to 14% or (2) falls to11%. The slope of the SML does not remain constant. How would thesechanges affect rUT?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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As an equity analyst you are concerned with what will happen to the required
return to Universal Toddler’s stock as market conditions change. Suppose
rRF 5 5%, rM 5 12%, and bUT 5 1.4.
a. Under current conditions, what is rUT, the required
stock?
b. Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope of
the SML remains constant. How would this affect rM and rUT?
c. Now assume rRF remains at 5% but rM (1) increases to 14% or (2) falls to
11%. The slope of the SML does not remain constant. How would these
changes affect rUT?
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