Question: Suppose r RF = 5%, r M = 9%, and b i = 1.6. 1A. What is r i , the required rate of return

Suppose r_RF = 5%, r_M = 9%, and b_i = 1.6.

1A. What is r_i, the required rate of return on Stock i? Round your answer to one decimal place.

1B. Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_i?

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

_{B. M} will remain the same and r_i will increase by 1 percentage point.

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

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

E. Both r_M and r_i will remain the same.

2. Now suppose r_RF decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_i?

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

B, Both r_M and r_i will increase by 1 percentage point.

C. Both r_M and r_i will remain the same.

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

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

2B. Now assume that r_RF remains at 5%, but r_M increases 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 %.

2. Now assume that r_RF remains at 5%, but r_M falls to 8%. 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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