Suppose r_RF = 6%, r_M = 10%, and b_i = 1.8.

A:

1. 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 7%. The slope of the SML remains constant. How would this affect r_M and r_i? (Multiple choice below)

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

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

iii. Both r_M and r_i will decrease by 1 percentage point.

iv. Both r_M and r_i will remain the same.

v.Both r_M and r_i will increase by 1 percentage point.

2. Now suppose r_RF decreases to 5%. The slope of the SML remains constant. How would this affect r_M and r_i? (Multiple choice below)

i. Both r_M and r_i will increase by 1 percentage point.

ii. Both r_M and r_i will remain the same.

iii. Both r_M and r_i will decrease by 1 percentage point.

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

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

C:

1. Now assume that r_RF remains at 6%, but r_M increases to 11%. 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 6%, 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 ______ %.