Suppose rRF = 6%, rM = 9%, and bi = 2.1. a. What is ri, the required rate of ret

Question

Suppose rRF = 6%, rM = 9%, and bi = 2.1.

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 7%. 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 5%. The slope of the SML remains constant. How would this affect rM and ri?

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

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

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

IV. Both rM and ri will remain the same.

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

C.

1. Now assume that rRF remains at 6%, but rM increases 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 _____%

2. Now assume that rRF remains at 6%, but rM falls to 8%. 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

a. required return = 6% + 2.1%*(9% - 6%) = 12.3%

b.

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

c.

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

3.

1. new Ri = 6% + 2.1*4% = 14.4%

2. new Ri 6% + 2.1*2% = 10.20%

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