eBook Problem Walk$-$Through

Suppose rRF $=4\%,$ rM $=13\%,$ and bi $=1\mathrm{.}7.$

What is ri$,$ the required rate of return on Stock i$?$ Round your answer to one decimal place.

$\%$

$1.$ Now suppose rRF increases to $5\%.$ The slope of the SML remains constant. How would this affect rM and ri$?$

Both rM and ri will increase by $1$ percentage point.

rM will remain the same and ri will increase by $1$ percentage point.

rM will increase by $1$ percentage point and ri will remain the same.

Both rM and ri will decrease by $1$ percentage point.

Both rM and ri will remain the same.

$-$Select$-$

$2.$ Now suppose rRF decreases to $3\%.$ The slope of the SML remains constant. How would this affect rM and ri$?$

Both rM and ri will decrease by $1$ percentage point.

rM will decrease by $1$ percentage point and ri will remain the same.

rM will remain the same and ri will decrease by $1$ percentage point.

Both rM and ri will increase by $1$ percentage point.

Both rM and ri will remain the same.

$-$Select$-$

$1.$ Now assume that rRF remains at $4\%,$ but rM increases to $14\%.$ The slope of the SML does not remain constant. How would these changes affect ri$?$ Round your answer to one decimal place.

The new ri will be

$\%.$

$2.$ Now assume that rRF remains at $4\%,$ but rM falls to $12\%.$ The slope of the SML does not remain constant. How would these changes affect ri$?$ Round your answer to one decimal place.

The new ri will be

$\%.$