eBook Problem Walk-Through

Suppose r_RF = 6%, r_M = 10%, and b_i = 1.6.

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

   %

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

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

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3. 1. Both r_M and r_i will remain the same.
   2. Both r_M and r_i will decrease by 1 percentage point.
   3. r_M will decrease by 1 percentage point and r_i will remain the same.
   4. r_M will remain the same and r_i will decrease by 1 percentage point.
   5. Both r_M and r_i will increase by 1 percentage point.
4. 1. Now assume that r_RF remains at 6%, but r_M increases 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 will be ___%.

   2. Now assume that 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_i? Round your answer to one decimal place.

   The new will be ___