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Problem Walk$-$Through

Suppose $r_{RF}=5\%,r_M=12\%,$ and $b_i=1\mathrm{.}8.$

a$.$ What is $n,$ the required rate of return on Stock i$?$ Round your answer to one decimal place. $\%$

b$.1.$ Now suppose $r_{RF}$ increases to $6\%.$ The slope of the SML remains constant. How would this affect $r_M$ and $n?$

I. ${}_M$ will remain the same and $n$ will increase by $1$ percentage point.

II$.r_M$ will increase by $1$ percentage point and $n$ will remain the same.

III. Both $r_M$ and $n$ will decrease by $1$ percentage point.

IV$.$ Both $r_M$ and $n$ will remain the same.

V$.$ Both $r_M$ and $n$ will increase by $1$ percentage point.

$2.$ Now suppose $r_{RF}$ decreases to $4\%.$ The slope of the SML remains constant. How would this affect $r_M$ and $n?$

I. Both $r_M$ and $n$ will remain the same.

II$.$ Both $ny$ and $n$ will decrease by $1$ percentage point.

III. $n_M$ will decrease by $1$ percentage point and $n$ will remain the same.

IV$.r_M$ will remain the same and $n$ will decrease by $1$ percentage point.

$V.$ Both $r_N$ and $n$ will increase by $1$ percentage point. decimal place.

The new $n$ will be $\%.$ decimal place.

The new $n$ will be $\%$