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 r_RF = 5%, r_M = 12%, and b_UT = 1.4.

a. Under current conditions, what is r_UT, the required rate of return on UT stock?

b. Now suppose r_RF (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_UT?

c. Now assume r_RF remains at 5% but r_M (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect r_UT?