Suppose rRF = 5%, rM = 10%, and bi = 1.3. A. What is ri, the required rate of re

Question

Suppose rRF = 5%, rM = 10%, and bi = 1.3.

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

___%

B. 1. Now assume that rRF remains at 5%, 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 5%, 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

CAPM equation:

ri = rRF + bi *(rM - rRF)

bi = 1.3 and rRF = 5%; rM = Variable in each case

A.

ri = 5% + 1.3 *(10% - 5%)

ri = 11.50%

B. New ri =?

ri = 5% + 1.3 *(11% - 5%)

ri = 12.80%

C. or 2. New ri =?

ri = 5% + 1.3 *(9% - 5%)

ri = 10.20%

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