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REQUIRED RATE OF RETURN Suppose rRF = 8%, rM = 13%, and bi = 1.2. What...

REQUIRED RATE OF RETURN

Suppose rRF = 8%, rM = 13%, and bi = 1.2.

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

  2. 1. Now suppose rRF increases to 9%. The slope of the SML remains constant. How would this affect rM and ri?

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

2. Now suppose rRF decreases to 7%. The slope of the SML remains constant. How would this affect rM and ri?

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

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

The new ri will be %.

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

The new ri will be %.

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