Risk and Return: Security Market Line

Required return on Stiock $=$ Risk$-$free return $+($Market risk premium$)($Stiock$\text{'}$s beta$)$

If a stock's expected return plots on or above the SML$,$ then the stock's return is

compensate the investor for risk.

$]$ to compensate the investor for risk. If a stock's expected return plots below the SML$,$ the stock's return is

to

changes in the amount of debt it uses.

Quantitative Problem: You are given the following information for Wine and Cork Enterprises $($WCE$)$:

$r_{RF}=4\%$;$r_M=7\%$;$R{P}_M=3\%,$ and beta $=1\mathrm{.}2$

What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

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