As an equity analyst, you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose r_RF = 6%, r_M = 10%, and b_UT = 1.5.

1. Under current conditions, what is r_UT, the required rate of return on UT Stock? 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_UT?

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

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

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

3. 1. Now assume r_RF remains at 6% but r_M increases to 12%. The slope of the SML does not remain constant. How would these changes affect r_UT?

      I. r_UT will decrease by 3%. II. r_UT will remain the same. III. r_UT will increase by 3%.

   2. Now assume r_RF remains at 6% but r_M falls to 9%. The slope of the SML does not remain constant. How would these changes affect r_UT?

      I. r_UT will remain the same. II. r_UT will decrease by 1.5%. III. r_UT will increase by 1.5%.