Question

Suppose RF = 3%, IM = 12%, and bj = 1.9. 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 4%. The slope of the SML remains constant. How would this affect rm and ri? I. IM will remain the same and ri will increase by 1%. II. rm will increase by 1% and ri will remain the same. III. Both rm and ri will decrease by 1%. IV. Both rm and ri will remain the same. V. Both rm and ri will increase by 1%. (1 2. Now suppose TRF decreases to 2%. The slope of the SML remains constant. How would this affect rm and ri? I. Both rm and ri will remain the same. II. Both rm and ri will decrease by 1%. III. rm will decrease by 1% and rj will remain the same. IV. rm will remain the same and ri will decrease by 1%. V. Both rm and ri will increase by 1%. I C. 1. Now assume that rRF remains at 3%, 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 ref remains at 3%, 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 %.

Answer 1

required return=risk free rate+beta*(market return-risk free rate)

1.
Option V

If risk free rate increases by x% and slope remains constant then rm and ri both increase by x%

2.
Option II

If risk free rate decreases by x% and slope remains constant then rm and ri both decrease by x%

3.
=3%+1.9*(13%-3%)
=22.0000%

4.
=3%+1.9*(11%-3%)
=18.2000%