Suppose r_RF = 4%, r_M = 11%, and b_i = 1.6.

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

2. 1. Now suppose r_RF increases to 5%. The slope of the SML remains constant. How would this affect r_M and r_i?

   1. Both r_M and r_i will increase by 1%.
   2. r_M will remain the same and r_i will increase by 1%.
   3. r_M will increase by 1% and r_i will remain the same.
   4. Both r_M and r_i will decrease by 1%.
   5. Both r_M and r_i will remain the same.

   1. Now assume that r_RF remains at 4%, 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 two decimal places.

   2. Now assume that r_RF remains at 4%, 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 two decimal places.