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Suppose rRF = 6%, rM = 10%, and bi = 1.5. 1. What is ri, the...

Suppose rRF = 6%, rM = 10%, and bi = 1.5.

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

=   

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

  1.   Both rM and ri will remain the same.

  2. IIBoth rM and ri will increase by 1 percentage point.

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

3. Now suppose rRF decreases to 5%. The slope of the SML remains constant. How would this affect rM and ri?

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

3.

  1. 1. Now assume that rRF remains at 6%, but rM increases to 11%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place.

    The new ri will be   %.

    2. Now assume that rRF remains at 6%, but rM falls to 9%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place.

    The new ri will be   %.

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