REQUIRED RATE OF RETURN Suppose rRF = 7%, rM = 10%, and bi = 2.1. What is ri, th

Question

REQUIRED RATE OF RETURN

Suppose rRF = 7%, rM = 10%, and bi = 2.1.

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

%

1C. Now assume that rRF remains at 7%, but rM increases 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  %.

2. Now assume that rRF remains at 7%, but rM falls to 9%. 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  %.

Explanation / Answer

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

1.Required return=7+2.1*(10-7)=13.3%

2.Required return=7+2.1*(11-7)=15.4%

Hence increase in required return=(15.4-13.3)=2.1%

3.Required return=7+2.1*(9-7)=11.2%

Hence decrease in required return=(13.3-11.2)=2.1%

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