8.12

REQUIRED RATE OF RETURN

Suppose r_RF = 6%, r_M = 12%, and b_i = 1.2.

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? I. Both r_M and r_i will increase by 1%. II. r_M will remain the same and r_i will increase by 1%. III. r_M will increase by 1% and r_i will remain the same. IV. Both r_M and r_i will decrease by 1%. V.Both r_M and r_i will remain the same.

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

3. 1. Both r_M and r_i will remain the same.
   2. Both r_M and r_i will decrease by 1%.
   3. r_M will decrease by 1% and r_i will remain the same.
   4. r_M will remain the same and r_i will decrease by 1%.
   5. Both r_M and r_i will increase by 1%.

1. 1. Now assume that r_RF remains at 6%, but r_M increases to 13%. 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 11%. 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 %.