Suppose rRF = 6%, rM = 9%, and bi = 1.8. What is ri, the required...

Suppose r_RF = 6%, r_M = 9%, and b_i = 1.8.

What is r_i, the required rate of return on Stock i? Round your answer to one decimal place.
%
1. Now suppose r_RF increases to 7%. The slope of the SML remains constant. How would this affect r_M and r_i?
1. Both r_M and r_i will remain the same.
2. Both r_M and r_i will increase by 1 percentage point.
3. r_M will remain the same and r_i will increase by 1 percentage point.
4. r_M will increase by 1 percentage point and r_i will remain the same.
5. Both r_M and r_i will decrease by 1 percentage point.

2. Now suppose r_RF decreases to 5%. The slope of the SML remains constant. How would this affect r_M and r_i?

Both r_M and r_i will increase by 1 percentage point.
Both r_M and r_i will remain the same.
Both r_M and r_i will decrease by 1 percentage point.
r_M will decrease by 1 percentage point and r_i will remain the same.
r_M will remain the same and r_i will decrease by 1 percentage point.

1. Now assume that r_RF remains at 6%, but r_M increases to 10%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to one decimal place.

The new r_i will be %.

2. Now assume that r_RF remains at 6%, but r_M falls to 8%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to one decimal place.

The new r_i will be %.

Expert Solution

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jeff jeffy answered 2 years ago

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