Question

Suppose rRF = 6%, rM = 11%, and bi = 1.9. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % 1. Now suppose rRF increases to 7%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will remain the same. Both rM and ri will increase by 1 percentage point. rM will remain the same and ri will increase by 1 percentage point. rM will increase by 1 percentage point and ri will remain the same. Both rM and ri will decrease by 1 percentage point. 2. Now suppose rRF decreases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will increase by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will decrease by 1 percentage point. rM will decrease by 1 percentage point and ri will remain the same. rM will remain the same and ri will decrease by 1 percentage point. 1. Now assume that rRF remains at 6%, but rM increases to 12%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place. The new ri will be %. 2. Now assume that rRF remains at 6%, but rM falls to 10%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to one decimal place. The new ri will be %

Answer 1

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' W = vura 1x 9 ENG 1 10:59 30-03-2020 ... X JA867 - X IV Fax IW IU IX IY IZ JA JB uc JD JE G A 844 845 846 847 848 849 rRF= 6% rM = 11% RPM = 5% [rRF-rM] beta = 1.90 REQUIRED RATE OF RETURN = rRF + beta(rM-rRF) rRF + beta(RPM) 6% + 1.9(5%) = 15.5% 850 851 852 853 ri = 15.5% 854 855 856 857 858 859 now if rRf= 7% slope of SML remains same that is rM-rRf = 5% as earlier rM-rRF = 5% rM -7% = 5% rM=12% 860 rM=12.0% ri = 7% + 1.9(5%) = 16.50% ri = 16.5% 861 862 863 864 865 866 867 BOTH Rm & ri WILL INCREASE BY 1% b(2) now if rRf= 5% slope of SML remains same UTILITY, SHARPE, beta coNvexity DGM beta KE CAPM port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... :

' W = vura 1x 9 ENG 1 10:59 30-03-2020 ... X JA888 - V x IV fix IW IU X Y Z JA JA JB JB JC JC JD JD JE JE G A b(2) now if rRf= 5% slope of SML remains same that is rM-rRf = 5% as earlier rM-rRF = 5% rM -5% = 5% rM=10% rM=10.0% ri =5% + 1.9(5%) = 14.50% ri =14.5% BOTH Rm & ri WILL DECREASE BY 1% 865 866 867 868 869 870 871 872 873 874 875 876 877 878 879 880 881 882 883 884 885 886 887 888 NOW IF M =12% ri = 6% + 1.9(12%-6%) = 17.40% NEW ri = 17.4% ri will increase by 1.9% IF GM =10% ri = 6% + 1.9(10%-6%) = ri will DECREASE by 1.9% 13.60% NEW ri= 13.6% ܩܩܩ KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... Đ