Question

REQUIRED RATE OF RETURN

Suppose r_RF = 8%, r_M = 13%, and b_i = 1.2.

1. What is r_i, the required rate of return on Stock i? Round your answer to two decimal places.
   %

2. 1. Now suppose r_RF increases to 9%. The slope of the SML remains constant. How would this affect r_M and r_i?

   1. Both r_M and r_i will decrease by 1%.
   2. Both r_M and r_i will remain the same.
   3. Both r_M and r_i will increase by 1%.
   4. r_M will remain the same and r_i will increase by 1%.
   5. r_M will increase by 1% and r_i will remain the same.

2. Now suppose r_RF decreases to 7%. The slope of the SML remains constant. How would this affect r_M and r_i?

1. r_M will decrease by 1% and r_i will remain the same.
2. r_M will remain the same and r_i will decrease by 1%.
3. Both r_M and r_i will increase by 1%.
4. Both r_M and r_i will remain the same.
5. Both r_M and r_i will decrease by 1%.

1. Now assume that r_RF remains at 8%, but r_M increases to 14%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.

The new r_i will be %.

2. Now assume that r_RF remains at 8%, but r_M falls to 12%. The slope of the SML does not remain constant. How would these changes affect r_i? Round your answer to two decimal places.

The new r_i will be %.

Answer 1