Question: QUESTION: The following graph presents the shift in the Security Market Line (SML) caused by increased risk aversion. The X-axis measures the beta while the

QUESTION: The following graph presents the shift in the Security Market

QUESTION: The following graph presents the shift in the Security Market Line (SML) caused by increased risk aversion. The X-axis measures the beta while the Y-axis measures the required rate of return. Case 1 presents the base case and case 2 represents increased risk aversion (State 5 answers with correct question number responses. Incomplete / illegible answers will not be marked.) Case 2 REQUIRED RATE OF RETURN % A Case 1 9+ TRF 4 1 B 1. According to the CAPM, B measures the 2. From the graph, the return of an "average stock has of 3. The return on the market (rm) in case 1 is 4. If the market risk premium increases to 7, and assuming the stock has a beta of 0.7, the required return on the stock will be 5. Point A can be calculated to be

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