Required rate of return

1. Suppose rRF = 3%, rM = 11%, and bi = 1.1.

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

b.) Now suppose rRF increases to 4%. The slope of the SML remains constant. How would this affect rM and ri?

a. Both rM and ri will decrease by 1%.

b. Both rM and ri will remain the same.

c. Both rM and ri will increase by 1%.

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

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

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

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

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

c. Both rM and ri will increase by 1%.

d. Both rM and ri will remain the same.

e. Both rM and ri will decrease by 1%.

3. Now assume that rRF remains at 3% but rM increases to 12%. 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 ____%

4. Now assume that rRF remains at 3% but rM falls 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 ___%