Suppose rRF = 8%, rM = 10%, and bi = 1.9. 2. Now suppose rRF decreases to 7%. Th

Question

Suppose rRF = 8%, rM = 10%, and bi = 1.9.

2. Now suppose rRF decreases to 7%. The slope of the SML remains constant. How would this affect rM and ri?

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

1. Now suppose rRF increases to 9%. The slope of the SML remains constant. How would this affect rM and ri?

rM will increase by 1% and ri will remain the same.

Both rM and ri will decrease by 1%.

Both rM and ri will remain the same.

Both rM and ri will increase by 1%.

rM will remain the same and ri will increase by 1%.

-Select-IIIIIIIVVItem 2

Both rM and ri will decrease by 1%.

rM will decrease by 1% and ri will remain the same.

rM will remain the same and ri will decrease by 1%.

Both rM and ri will increase by 1%.

Both rM and ri will remain the same.

-Select-IIIIIIIVVItem 3

1. Now assume that rRF remains at 8%, but rM increases 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 %.

2. Now assume that rRF remains at 8%, but rM falls to 9%. 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 %.

Explanation / Answer

2)Rm will not change and Ri=Risk free+(beta*(Rm-Rf))
=7%+(1.9*(10%-7%))
=12.70%
before the Ri is =8%+(1.9*(10%-8%))=11.8%
So the Ri is decreased

If the Rf is increased to 9% then Rm will remain same and Ri=9%+(1.9*(10%-9%))=10.9%
so it decrased by 1%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.