Suppose r_RF = 5%, r_M = 13%, and b_i = 1.5.

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

-Select-IIIIIIIVVItem 3

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

%

1. Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_i?

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

Both r_M and r_i will decrease by 1 percentage point.

Both r_M and r_i will remain the same.

Both r_M and r_i will increase by 1 percentage point.

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

-Select-IIIIIIIVVItem 2

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

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

Both r_M and r_i will increase by 1 percentage point.

Both r_M and r_i will remain the same.

Both r_M and r_i will decrease by 1 percentage point.

1. Now assume that r_RF remains at 5%, but r_M increases to 14%. 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 5%, but r_M falls 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 %.