Question: Instructions: Show all of your work using the formulas for maximum credit. During the coming year, the market risk premium is expected to rise, while

Instructions: Show all of your work using the formulas for maximum credit.

During the coming year, the market risk premium is expected to rise, while the risk free rate is expected to stay the same. Given this statement, which of the following is correct?

a. The required return for all stocks will rise by the same amount.

b. The required return will rise for all stocks, but it will rise more for stocks with higher

betas.

c. The required return will rise for all stocks, but it will rise more for stocks with

lower betas.

d. The required return will fall for stocks with beta greater than 1.0, and will

rise for stocks with a beta less than 1.0.

Show me with a graph of the SML with a risk free rate of 2% and an expected return on the market of 9%.

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