Question

Suppose r_RF = 6%, r_M = 9%, and b_i = 1.6.

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

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 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 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-IIIIIIIVV
   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%.
3. 
   
4. 
   
5. -Select-IIIIIIIVV

7. 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 two decimal places.

   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 two decimal places.

   The new r_i will be %.

Answer 1

What is ri, the required rate of return on Stock i?
=6%+1.6*(9%-6%)
=10.8000%

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

Both rM and ri will increase by 1%.

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

Both rM and ri will decrease by 1%.

Now assume that rRF remains at 6%, but rM increases to 10%. The slope of the SML does not remain constant. How would these changes affect ri?

The new ri will be =6%+1.6*(10%-6%)=12.4000%

Now assume that rRF remains at 6%, but rM falls to 8%. The slope of the SML does not remain constant. How would these changes affect ri?

The new ri will be =6%+1.6*(8%-6%)=9.2000%