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

$=$

$1\mathrm{.}4$

$.$

Under current conditions, what is

r

UT

$,$ the required rate of return on UT stock?

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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

$?$

SHOW ANSWER

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

$?$