Problem 8-12 Required rate of return

Suppose rRF = 7%, rM = 9%, and bi = 1.3.

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

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1. Now suppose rRF increases to 8%. The slope of the SML remains constant. How would this affect rM and ri? PICK ONE BELOW

rM will increase by 1% and ri will remain the same.

Both rM and ri will decrease by 1%.

Both rM and ri will remain the same.

Both rM and ri will increase by 1%.

rM will remain the same and ri will increase by 1%.

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2. Now suppose rRF decreases to 6%. The slope of the SML remains constant. How would this affect rM and ri? PICK ONE BELOW:

rM will remain the same and ri will decrease by 1%.

Both rM and ri will increase by 1%.

Both rM and ri will remain the same.

Both rM and ri will decrease by 1%.

rM will decrease by 1% and ri will remain the same.

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1. Now assume that rRF remains at 7% but rM increases to 10%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.

The new ri will be ______%

2. Now assume that rRF remains at 7% but rM falls to 8%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.

The new ri will be _______%