Question

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Problem Walk-Through

Problem 8-12
Required rate of return

Suppose r_RF = 7%, r_M = 11%, and b_i = 1.8.

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

2. Now suppose r_RF increases to 8%. The slope of the SML remains constant. How would this affect r_M and r_i?

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

3. Now suppose r_RF decreases to 6%. The slope of the SML remains constant. How would this affect r_M and r_i?

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

4. Now assume that r_RF remains at 7% but r_M increases 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  %

5. Now assume that r_RF remains at 7% but r_M falls to 10%. 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