Macroeconomics + Economy 2009 Update 18th Edition by Campbell McConnell, Sean Masaki Flynn,Stanley Brue

Exercise 3

Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors' dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall Next, compare what will happen to the rates of return on low-risk and high-risk investments. Which will have a larger increase in average expected rates of return, investments with high betas or investments with low betas And will high-beta or low-beta investments show larger percentage changes in their prices