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
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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 rate of return on UT
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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