Question
1.Suppose r RF = 4%, r M = 10%, and b i = 1.4. a.What is r i , the required rate of return on
1.Suppose rRF = 4%, rM = 10%, and bi = 1.4.
a.What is ri, the required rate of return on Stock i?
b.Now suppose that rRF (1) increases to 5%; or (2) decreases to 3%. The slope of the SML remains constant. How would this affect rM and ri?
c.Now assume that rRF remains at 4%, but rM (1) increases to 12%; or (2) falls to 9%. The slope of the SML does not remain constant. How would this affect ri?
(Hint: the slope of the SML is the market risk premium)
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Fundamentals of Investments Valuation and Management
Authors: Bradford Jordan, Thomas Miller
7th edition
978-0078096785, 78096782, 978-0077861636, 77861639, 978-0078115660
