Question

Suppose rRF = 4%, rM = 13%, and bi = 1.1. What is ri, the required rate of return on Stock i? Round your answer to two decimal places. % 1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will remain the same. Both rM and ri will increase by 1%. rM will remain the same and ri will increase by 1%. rM will increase by 1% and ri will remain the same. Both rM and ri will decrease by 1%. 2. Now suppose rRF decreases to 3%. The slope of the SML remains constant. How would this affect rM and ri? rM will remain the same and ri will decrease by 1%. Both rM and ri will increase by 1%. Both rM and ri will remain the same. Both rM and ri will decrease by 1%. rM will decrease by 1% and ri will remain the same. 1. Now assume that rRF remains at 4%, 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 4%, 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 %. Check My Work

Answer 1

What is ri, the required rate of return on Stock i? Round your answer to two decimal places. %
=4%+1.1*(13%-4%)=13.90%

1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri?
Both rM and ri will increase by 1%.

2. Now suppose rRF decreases to 3%. The slope of the SML remains constant. How would this affect rM and ri?
Both rM and ri will decrease by 1%.

1. Now assume that rRF remains at 4%, 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 =4%+1.1*(14%-4%)=15.00%

2. Now assume that rRF remains at 4%, 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 =4%+1.1*(12%-4%)=12.80%