Question: Problem 7 Suppose r RF = 4%, r M = 9%, and b i = 1.3. a. What is r i , the required rate

Problem 7

Suppose rRF = 4%, rM = 9%, and bi = 1.3.

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

-------%

b. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri?

1. rM will increase by 1 percentage point and ri will remain the same.Both rM and ri will decrease by 1 percentage point.

2. Both rM and ri will remain the same.

3. Both rM and ri will increase by 1 percentage point.

4. rM will remain the same and ri will increase by 1 percentage point.

select one of the above

. Now suppose rRF decreases to 3%. The slope of the SML remains constant. How would this affect rM and ri?

1.rM will remain the same and ri will decrease by 1 percentage point.

2.Both rM and ri will increase by 1 percentage point.

3.Both rM and ri will remain the same.

4.Both rM and ri will decrease by 1 percentage point.

5. rM will decrease by 1 percentage point and ri will remain the same.

Select one of the above

c. 1. Now assume that rRF remains at 4%, 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 ----------- %.

Now assume that rRF remains at 4%, 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.

d. The new ri will be-------- %

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