Question

REQUIRED RATE OF RETURN

Suppose r_RF = 3%, r_M = 9%, and b_i = 1.2.

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

2. 1. Now suppose r_RF increases to 4%. The slope of the SML remains constant. How would this affect r_M and r_i?

   1. r_M will increase by 1% and r_i will remain the same.
   2. Both r_M and r_i will decrease by 1%.
   3. Both r_M and r_i will remain the same.
   4. Both r_M and r_i will increase by 1%.
   5. r_M will remain the same and r_i will increase by 1%.
   
   

2. Now suppose r_RF decreases to 2%. The slope of the SML remains constant. How would this affect r_M and r_i?

1. Both r_M and r_i will increase by 1%.
2. Both r_M and r_i will remain the same.
3. Both r_M and r_i will decrease by 1%.
4. r_M will decrease by 1% and r_i will remain the same.
5. r_M will remain the same and r_i will decrease by 1%.

1. Now assume that rRF remains at 3%, 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 3%, 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 %.

Answer 1

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Home ert Page Layout Formulas Data Review V 義Cut ta copy." Add-Ins AutoSum 11 Arap Text Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles ClearFilter Select Clipboard Font Cells dting Alignment C715 IU JD IV ix IY iZ JA JB JC JF JH IW JE JG 715 716 3% 9% 696 [rRF_rM] rRF RPM beta- REQUIRED RATE OF RETURN rRF +beta(rM-rRF) rRF + beta(RPM) 396 + 1.2(5%)- 718 719 720 721 722 723 724 725 726 727 728 729 730 731 732 733 44AH KE CAPM UTILITY, SHARPE, beta bond 1.20 10.20% now if rRf-4% slope of SML remains same that is rM_rRf = 6% as earlier rM-4%-6% 1096 rM-1096 ri = 4% + 1.2(10%-4%)- ri-11.2% 11.20% BOTH Rm & ri WILL INCREASE BY 1% PV, FV, ANNUITY DIR right clean YIELD bond RES1 ex di14 | future INDEX · INTL CAP BUD stru WACC erences: AG470 4 ENG 28-04-2019

Home ert Page Layout Formulas Data Review V Add-Ins 義Cut aCopy Format Painter AutoSum Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Filter Select 袖 2 Clear , Formatting ▼ as Table-styles ▼ Styles ▼ ▼ ▼ Clipboard Font Cells dting Alignment C735 IU JD IV IW b(2) IX IY iZ JA JB JC JF JH JE JG now if rRf-2% slope of SMLremains same that is rM_rRf-6% as earlier rM-296 6% rM-896 735 736 737 738 739 740 741 742 743 744 745 746 747 748 749 750 751 752 753 4 KE CAPM UTILITY, SHARPE, beta rM-8% ri = 9.2% ri-2% + 1.2(896-2%)- 9.20% BOTH rM and ri WILL DECREASE BY 1% rM-1096 ri-3% + 1.2(10%-3%)- 11.40% ri-11.4% will increase by 1.2% (11.4-10.2) rM-8% ri-3% + 1.2(896-396) 9.00% ri= 9.0% will DECREASE by 1.2% bond c (10.2-9) PV, FV, ANNUITY DIR right clean YIELD bond tru WACCRESI ex i future INDEX INTL CAP BUD erences: AG470 04:43 멎园遛14..al t@ m木6 ENG 28-04-2019