Question: Suppose r RF = 5%, r M = 11%, and b i = 1.8. a) What is r i , the required rate of return

Suppose r_RF = 5%, r_M = 11%, and b_i = 1.8.

a) What is r_i, 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 r_i? multiple choice

I. r_M will increase by 1 percentage point and r_i will remain the same.

II. Both r_M and r_i will decrease by 1 percentage point.

III. Both r_M and r_i will remain the same.

IV. Both r_M and r_i will increase by 1 percentage point.

V. r_M will remain the same and r_i 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 r_i?

I. Both r_M and r_i will increase by 1 percentage point.

II. Both r_M and r_i will remain the same.

III. Both r_M and r_i will decrease by 1 percentage point.

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

V. r_M will remain the same and r_i will decrease by 1 percentage point.

C) 1. 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 one decimal place.

The new r_i will be _____%

2. 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 one decimal place.

The new r_i will be _____ %.

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