Suppose r_RF = 8%, r_M = 9%, and b_i = 1.6.

Now suppose r_RF decreases to 7%. The slope of the SML remains constant. How would this affect r_M and r_i?

1. What is r_i, the required rate of return on Stock i? Round your answer to two decimal places. %

2. 1. Now suppose r_RF increases to 9%. The slope of the SML remains constant. How would this affect r_M and r_i?

   1. Both r_M and r_i will remain the same.
   2. Both r_M and r_i will increase by 1%.
   3. r_M will remain the same and r_i will increase by 1%.
   4. r_M will increase by 1% and r_i will remain the same.
   5. Both r_M and r_i will decrease by 1%.
   -Select-IIIIIIIVVItem 2
   1. Both r_M and r_i will remain the same.
   2. Both r_M and r_i will decrease by 1%.
   3. r_M will decrease by 1% and r_i will remain the same.
   4. r_M will remain the same and r_i will decrease by 1%.
   5. Both r_M and r_i will increase by 1%.

3. 1. Now assume that r_RF remains at 8%, 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 two decimal places.

   The new r_i will be %.

   2. Now assume that r_RF remains at 8%, 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 two decimal places.

   The new r_i will be %.