(6–7)

Required Rate of Return Suppose rRF = 9%, rM = 14%, and bi = 1.3.

a. What is ri, the required rate of return on Stock i?

b. Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri?

c. Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%.

The slope of the SML does not remain constant. How would these changes affect ri?