Suppose r_RF = 3%, r_M = 11%, and b_i = 1.3.

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

%

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

1. r_M will increase by 1 percentage point and r_i will remain the same.
2. Both r_M and r_i will decrease by 1 percentage point.
3. Both r_M and r_i will remain the same.
4. Both r_M and r_i will increase by 1 percentage point.
5. r_M will remain the same and r_i will increase by 1 percentage point.
6. Both r_M and r_i will remain the same.
7. Both r_M and r_i will decrease by 1 percentage point.
8. r_M will decrease by 1 percentage point and r_i will remain the same.
9. r_M will remain the same and r_i will decrease by 1 percentage point.
10. Both r_M and r_i will increase by 1 percentage point.
11. 1. Now assume that r_RF remains at 3%, but r_M increases to 12%. 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 %.

2. Now assume that r_RF remains at 3%, but r_M falls to 10%. 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 %.