Suppose you are the money manager of a $3 68 million investment fund The fund consists of 4 stocks with the following investments and betas Stock Investment Beta A $ 200,000 1 50 B 380,000 0 50 C 1,100,000 1 25 D 2,000,000 0 75 If the market's required rate of return is 9 and the risk free rate is 7 , what is the fund's required rate of return Round your answer to two decimal places Suppose r RF 5 , r M 11 , and b i 1 3 What is r i , the required rate of return on Stock i Round your answer to two decimal places Now suppose r RF increases to 6 The slope of the SML remains constant How would this affect r M and r i Both r M and r i will remain the same Both r M and r i will increase by 1 r M will remain the same and r i will increase by 1 r M will increase by 1 and r i will remain the same Both r M and r i will decrease by 1 Select IIIIIIIVV Now suppose r RF decreases to 4 The slope of the SML remains constant How would this affect r M and r i Both r M and r i will increase by 1 Both r M and r i will remain the same Both r M and r i will decrease by 1 r M will decrease by 1 and r i will remain the same r M will remain the same and r i will decrease by 1 Select IIIIIIIVV 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 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 The new r i will be

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 10, 2024

Suppose you are the money manager of a $3.68 million investment fund. The fund consists of 4 stocks with the following investments and betas: Stock

Suppose you are the money manager of a $3.68 million investment fund. The fund consists of 4 stocks with the following investments and betas:

Stock	Investment	Beta
A	$ 200,000	1.50
B	380,000	- 0.50
C	1,100,000	1.25
D	2,000,000	0.75

If the market's required rate of return is 9% and the risk-free rate is 7%, what is the fund's required rate of return? Round your answer to two decimal places. %

Suppose r_RF = 5%, r_M = 11%, and b_i = 1.3.

What is r_i, the required rate of return on Stock i? Round your answer to two decimal places. %
Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_i?
1. Both r_M and r_i will remain the same.
2. Both r_M and r_i will increase by 1%.
3. r_M will remain the same and r_i will increase by 1%.
4. r_M will increase by 1% and r_i will remain the same.
5. Both r_M and r_i will decrease by 1%.

-Select-IIIIIIIVV

Now suppose r_RF decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_i?
1. Both r_M and r_i will increase by 1%.
2. Both r_M and r_i will remain the same.
3. Both r_M and r_i will decrease by 1%.
4. r_M will decrease by 1% and r_i will remain the same.
5. r_M will remain the same and r_i will decrease by 1%.

-Select-IIIIIIIVV

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 %

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.

The new r_i will be %