3. Assume that the market is in equilibrium and that stock betas can be estimated with historical data. The returns on the market, the returns on United Fund (UF), the risk-free rate (7.00%), and the required return on the United Fund (15.00%) are shown below. Based on this information, what is the required return on the market, m? Year 2011 2012 2013 2014 2015 Market -9% 11% 15% 5% -1% UF -14% 16% 22% 7% -2%

. E(RI) = .15(.11) + .55(.18) + .30(.08) Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas   Stock                                       Beta WND                                             0.80 STA                                              1.35 CTE                                              1.15 DUY                                              1.20 EVN                                             -0.20 Stock WND the economy’s RFR to be 6 percent (0.06) and the expected return on the market portfolio (E(RM)) to be 8 percent (0.08)   Stock STA, the economy’s RFR to be 5percent (0.05) and the expected return on the market portfolio (E(RM)) to be 7 percent(0.07)   Assume that all the other stocks is as follows since we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio  (E(RM)) to be 9 percent (0.09),

Excel Online Structured Activity: Historical Return: Expected and Required Rates of Return You have observed the following returns over time: Year Stock X Stock Y Market 2011 14 % 12 % 10 % 2012 20   7   9   2013 -13   -2   -13   2014 3   1   2   2015 19   9   12   Assume that the risk-free rate is 4% and the market risk premium is 6%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.     Open spreadsheet     What is the beta of Stock X? Do not round intermediate calculations. Round your answer to two decimal places. fill in the blank 2 What is the beta of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places. fill in the blank 3 What is the required rate of return on Stock X? Do not round intermediate calculations. Round your answer to one decimal place. fill in the blank 4 % What is the required rate of return on Stock…

13. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. REQUIRED RATE OF RETURN (Percent) REQUIRED RATE OF RETURN (Percent) 20.0 16.0 20 12.0 16 8.0 12 4.0 0 0 CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's betal Required rate of return on Happy Corp. stock 0 Happy Corp.'s new required rate of return is F 0.6, 7.6 HC's Stock ☐ 0.5 An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. 0 1.0 RISK (Beta) Tool tip: Mouse over the…