Problem 8-12 Required rate of return

1. Suppose r_RF = 6%, r_M = 13%, and b_i = 2.1.

What is r_i, the required rate of return on Stock i? Round your answer to two decimal places. %

2. Now suppose r_RF increases to 7%. The slope of the SML remains constant. How would this affect r_M and r_i? CHOOSE ONE.

Both r_M and r_i will remain the same.

Both r_M and r_i will increase by 1%.

r_M will remain the same and r_i will increase by 1%.

r_M will increase by 1% and r_i will remain the same.

Both r_M and r_i will decrease by 1%.

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

Both r_M and r_i will decrease by 1%.

r_M will decrease by 1% and r_i will remain the same.

r_M will remain the same and r_i will decrease by 1%.

Both r_M and r_i will increase by 1%.

Both r_M and r_i will remain the same.

4. Now assume that r_RF remains at 6% but r_M increases to 14%. 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

%

5. Now assume that r_RF remains at 6% but r_M falls to 12%. 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