Suppose r_RF = 5%, r_M = 11%, and b_i = 2.

1. 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 6%. The slope of the SML remains constant. How would this affect r_M and r_i?

-Select-IIIIIIIVVItem 2

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

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

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

1. 1. Now assume that r_RF remains at 5%, 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.

   The new r_i will be %.
3. Now assume that r_RF remains at 5%, 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.
4. The new r_i will be %.