Suppose $r_{RF}=4\%,r_M=10\%,$ and $b_i=1\mathrm{.}6.$

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

$\%$

b$.1.$ Now suppose $r_{RF}$ increases to $5\%.$ The slope of the SML remains constant. How would this affect $r_M$ and $r_i?$

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

II$.$ Both $r_M$ and $r_i$ will increase by $1$ percentage point.

III. $r_M$ will remain the same and $r_i$ will increase by $1$ percentage point.

IV$.r_M$ will increase by $1$ percentage point and $r_i$ will remain the same.

V$.$ Both $r_M$ and $r_i$ will decrease by $1$ percentage point.

Now suppose rRF decreases to $3\%.$ The slope of the SML remains constant. How would this affect $r_M$ and $r_i?$

I. Both $r_M$ and $r_i$ will decrease by $1$ percentage point.

II$.rM$ will decrease by $1$ percentage point and $r_i$ will remain the same.

III. $r_M$ will remain the same and $r_i$ will decrease by $1$ percentage point.

IV$.$ Both $r_M$ and $r_i$ will increase by $1$ percentage point.

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

c$.1.$ Now assume that rRF remains at $4\%,$ but rM increases to $11\%.$ The slope of the SML does not remain constant. How would these changes affect rip Round your answer to one

decimal place.

The new $r_i$ will be

$\%.$

Now assume that rRF remains at $4\%,$ 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 one decimal

place.

The new $r_i$ will be

$\%.$