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  3. required rate of return suppose rrf = 3%, rm = 9%,

REQUIRED RATE OF RETURN Suppose rRF = 3%, rM = 9%, and bi = 1.2....

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Finance

REQUIRED RATE OF RETURN

Suppose rRF = 3%, rM = 9%, and bi = 1.2.

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

  2. 1. Now suppose rRF increases to 4%. The slope of the SML remains constant. How would this affect rM and ri?

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

2. Now suppose rRF decreases to 2%. The slope of the SML remains constant. How would this affect rM and ri?

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

  2. 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 %.

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