eBook Problem Walk-Through

Suppose r_RF = 5%, r_M = 12%, and b_i = 1.7.

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

%

b. Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_i?

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

c. Now suppose r_RF decreases to 4%. The slope of SML remains constant. How would this affect r_M and r_i?

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

d. Now assume that r_RF remains at 5%, 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 one decimal place.

The new r_i will be_________ %.

e. 2. Now assume that r_RF remains at 5%, 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 one decimal place.

The new r_i will be_______ %.