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Question - Lulusoft Company creates software that runs smart athletic gear. As part of your portfolio analysis project, you are estimating your required rate of return on an investment in Lulusoft using the Securities Market Line (SML).
You have looked up the current risk-free rate of return, which is 1%. Given the numerous disruptive events going on in the world and in the markets, you estimate the market risk premium to be 6.5%. Lulusoft's most recent beta estimate is 1.54.
Required -
1. Show calculations for Lulusoft's required rate of return given this information.
2. Explain how the SML would change if the risk-free rate were to rise to 3%.
3. Independent of the change in part b, explain how the SML would change if the market risk premium fell to 3%.
4. If Lulusoft's beta dropped to 1.39 six months from now, would its required rate of return rise or fall? Explain.
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