Question: Suppose rRF = 3%, rM = 12%, and bi = 1.6. A) What is ri, the required rate of return on Stock i? Round your

Suppose rRF = 3%, rM = 12%, and bi = 1.6.

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 4%. The slope of the SML remains constant. How would this affect rM and ri?

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

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

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

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

IV.Both rM and ri will remain the same.

2. Now suppose rRF decreases to 2%. The slope of the SML remains constant. How would this affect rM and ri?

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

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

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

IV. Both rM and ri will remain the same.

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

C. 1. Now assume that rRF remains at 3%, but rM increases to 13%. 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 %.

2. Now assume that rRF remains at 3%, but rM falls to 11%. 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 %.

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