Suppose r_RF = 6%, r_M = 10%, and b_i = 1.5.

1. 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 7%. 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

Answer____________________________________

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

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

-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.

Answer___________________

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 _______ %.