REQUIRED RATE OF RETURN

Suppose $r_{RF}=7\%,r_M=13\%,$ and $b_i=2\mathrm{.}1.$

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

$\%$

b$.1.$ Now suppose $r_{RF}$ increases to $8\%.$ The slope of the SML remains constant. How would this affect $r_M$ and $r_i?$

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

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

III. Both $r_M$ and $r_i$ will decrease by $1\%.$

IV$.$ Both $r_M$ and $r_i$ will remain the same.

V$.$ Both $r_M$ and $r_i$ will increase by $1\%.$

$2.$ Now suppose $r_{RF}$ decreases to $6\%.$ The slope of the SML remains constant. How would this affect $r_M$ and $r_{?}?$

I. Both $r_M$ and $r_1$ will decrease by $1\%.$

II$.r_M$ will decrease by $1\%$ and $r_1$ will remain the same.

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

IV$.$ Both $r_M$ and $r_i$ will increase by $1\%.$

$v.$ Both $r_M$ and $r_i$ will remain the same.

The new ri will be $\%.$

The new $r_i$ will be $\%.$