10. Problem 8.12 (Required Rate of Return) eBook Problem Walk-Through Suppose rri = 6%, rm = 10%, and b = 1.3. a. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % b. 1. Now suppose rrf increases to 7%. The slope of the SML remains constant. How would this affect rm and n? I. Both rm and ri will remain the same. II. Both rm and ri will increase by 1 percentage point. III. rm will remain the same and i will increase by 1 percentage point. IV. rm will increase by 1 percentage point and ri will remain the same. V. Both rm and i will decrease by 1 percentage point. -Select- 2. Now suppose rre decreases to 5%. The slope of the SML remains constant. How would this affect rm and ri? I. Both rm and ri will remain the same. II. Both rm and ri will decrease by 1 percentage point. III. rm will decrease by 1 percentage point and ri will remain the same. IV. rm will remain the same and ri will decrease by 1 percentage point. V. Both rm and ri will increase by 1 percentage point. -Select- v c. 1. Now assume that ref remains at 6%, but rm increases to 11%. The slope of the SML does not remain constant. How would these changes affect n? Round your answer to one decimal place. The new r will be %. 2. Now assume that rre remains at 6%, but rm falls to 9%. The slope of the SML does not remain constant. How would these changes affect ni? Round your answer to one decimal place. The new ri will be %. eBook Problem Walk-Through Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 20% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. a. Calculate each stock's coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places. CVX = CVy = b. Which stock is riskier for a diversified investor? I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is riskier. Stock Y has the higher beta so it is riskier than Stock X. II. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is riskier. Stock X has the higher standard deviation so it is riskier than Stock Y. III. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is riskier. Stock X has the lower beta so it is riskier than Stock Y. IV. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is riskier. Stock Y has the lower standard deviation so it is riskier than Stock X. V. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X. -Select- c. Calculate each stock's required rate of return. Round your answers to one decimal place. rx = % ry = % d. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? -Select- e. Calculate the required return of a portfolio that has $4,500 invested in Stock X and $1,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp = % f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return? -Select