Suppose rFr=9%, rM=14% and bi=1.3.
a). What is ri, the required rate of return on Stock i?
b). Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri?
c). Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?
Click here for the solution: Suppose rFr=9%, rM=14% and bi=1.3.
