Suppose rRF = 9%, rM = 14%, and βX = 1.3.
a. What is rX, the required rate of return on Stock X?
b. Now suppose rRF
(1) Increases to 10 percent
(2) Decreases to 8 percent. The slope of the SML remains constant. How would each change affect rM and rX?
c. Assume rRF remains at 9 percent, but rM
(1) Increases to 16 percent
(2) Decreases to 13 percent. The slope of the SML does not remain constant. How would these changes affect rX?