Question: Suppose the expected return on the market portfolio is 13.8 percent and the risk-free rate is 6.4 percent. Solomon Inc. stock has a beta of 1.2. Assume the capital-asset-pricing model holds.
Return on Stock= Rf+B(Rm-Rf)
Rf= risk free rate
B=beta
Rm= Expected return on market portfolio
Q1. What is the expected return on Solomon's stock?
Q2. If the risk-free rate decreases to 3.5 percent, what is the expected return on Solomon's stock?