Question: 1.Suppose r RF = 4%, r M = 10%, and b i = 1.4. a.What is r i , the required rate of return on

1.Suppose r_RF = 4%, r_M = 10%, and b_i= 1.4.

a.What is r_i, the required rate of return on Stock i?

b.Now suppose that r_RF (1) increases to 5%; or (2) decreases to 3%. The slope of the SML remains constant. How would this affect r_M and r_i?

c.Now assume that r_RF remains at 4%, but r_M (1) increases to 12%; or (2) falls to 9%. The slope of the SML does not remain constant. How would this affect r_i?

(Hint: the slope of the SML is the market risk premium)

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