Suppose rRF = 5%, rM = 11%, and bi = 1.3. b. 1, Now suppose nr increases to 6%.

Question

Suppose rRF = 5%, rM = 11%, and bi = 1.3.

b. 1, Now suppose nr increases to 6%. The slope of the SML remains constant. How would this affect m and n? I. n1 will remain the same and ri will increase by 1%. IL. rM will increase by 1% and ri will remain the same 111. Both rM and ri will decrease by 1%. TV. Both rM and ri will remain the same V. Both rM and ri will increase by 1%. -Select- 2. Now suppose rRF decreases to 4%. The slope of the SML remains constant. How would this affect rM and ri? l, r, will remain the same and ri will decrease by 1%. I. Both rM and ri will increase by 1%. III. Both rM and ri will remain the same. V. Both rM and ri will decrease by 1%. V. rM will decrease by 196 and ri will remain the same. Select Now assume that rRF remains at 5% but rM increases to 29. The slope the SM does not remain constant. How would these changes a ectn ? Round your answer o vo decima places. The new ri will be 2. Now assume that rRF remains at 596, but r falls to 10%. The slope of the SML does not remain constant. How would these changes affect n? Round your answer to two decimal places. The new ri will be

Explanation / Answer

Required rate of return on stock i = rrf + beta * (rm - rrf)

= 5% + 1.3*(11 - 5)%

= 12.8%

Ans b1) rm will increase by 1% and ri will remain the same.

Ans b2) rm will decrease by 1% and ri will remain the same.

Ans c1) new ri = 5% + 1.3*7% = 14.1%

Ans c2) new ri = 5% + 1.3*5% = 11.5%

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