Response to the following problem:
Suppose rRF 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 percent or (2) decreases to 8 percent. The slope of the SML remains constant. How would this affect rM and ri ?
c. Now assume rRF remains at 9 percent but rM (1) increases to 16 percent or (2) falls to 13 percent. The slope of the SML does not remain constant. How would these changes affect ri ?