Question: Suppose rRF = 7%, rM = 12%, and bi = 1.4. A. What is ri, the required rate of return on Stock i? Round your

Suppose rRF = 7%, rM = 12%, and bi = 1.4.

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

B 1. Now suppose rRF increases to 8%. The slope of the SML remains constant. How would this affect rM and ri?

I. Both rM and ri will decrease by 1%.

II. Both rM and ri will remain the same.

III.Both rM and ri will increase by 1%.

IV.rM will remain the same and ri will increase by 1%.

V.rM will increase by 1% and ri will remain the same.

2. Now suppose rRF decreases to 6%. The slope of the SML remains constant. How would this affect rM and ri?

I. Both rM and ri will decrease by 1%.

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

III.rM will remain the same and ri will decrease by 1%.

IV.Both rM and ri will increase by 1%.

V.Both rM and ri will remain the same.

C. 1. Now assume that rRF remains at 7%, but rM increases to 13%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.

The new ri will be %.

2. Now assume that rRF remains at 7%, but rM falls to 11%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places. The new ri will be %.

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