REQUIRED RATE OF RETURN

Suppose r_RF = 3%, r_M = 10%, and b_i = 1.8.

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

1. Now suppose r_RF increases to 4%. The slope of the SML remains constant. How would this affect r_M and r_i?

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%.

Both r_M and r_i will remain the same.

Both r_M and r_i will increase by 1%.

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

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.

Both r_M and r_i will decrease by 1%.

1. Now assume that r_RF remains at 3%, 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 two decimal places.

The new r_i will be %.

2. Now assume that r_RF remains at 3%, 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 two decimal places.

The new r_i will be %.