Question
Suppose r RF = 6%, r M = 9%, and b i = 1.4. What is r i , the required rate of return on
Suppose rRF = 6%, rM = 9%, and bi = 1.4.
- What is ri, the required rate of return on Stock i? Round your answer to one decimal place.
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- 1. Now suppose rRF increases to 7%. The slope of the SML remains constant. How would this affect rM and ri?
- rM will remain the same and ri will increase by 1 percentage point.
- rM will increase by 1 percentage point and ri will remain the same.
- Both rM and ri will decrease by 1 percentage point.
- Both rM and ri will remain the same.
- Both rM and ri will increase by 1 percentage point.
- Both rM and ri will decrease by 1 percentage point.
- rM will decrease by 1 percentage point and ri will remain the same.
- rM will remain the same and ri will decrease by 1 percentage point.
- Both rM and ri will increase by 1 percentage point.
- Both rM and ri will remain the same.
- 1. Now assume that rRF remains at 6%, but rM increases to 10%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place.
The new ri will be %.
2. Now assume that rRF remains at 6%, but rM falls to 8%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place.
The new ri will be %.
You have been managing a $5 million portfolio that has a beta of 0.95 and a required rate of return of 9.175%. The current risk-free rate is 3%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.65, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.
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