Required rate of return
1. Suppose rRF = 3%, rM = 11%, and bi = 1.1.
a.) What is ri, the required rate of return on Stock i? Round your answer to two decimal places. ___ %
b.) Now suppose rRF increases to 4%. The slope of the SML remains constant. How would this affect rM and ri?
a. Both rM and ri will decrease by 1%.
b. Both rM and ri will remain the same.
c. Both rM and ri will increase by 1%.
d. rM will remain the same and ri will increase by 1%.
e. rM will increase by 1% 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?
a. rM will decrease by 1% and ri will remain the same.
b. rM will remain the same and ri will decrease by 1%.
c. Both rM and ri will increase by 1%.
d. Both rM and ri will remain the same.
e. Both rM and ri will decrease by 1%.
3. Now assume that rRF remains at 3% but rM increases to 12%. 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 ____%
4. Now assume that rRF remains at 3% but rM falls to 10%. 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 ___%