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Problem on required rate of return on stock


Suppose rRF=9%, rM=14%, and bi=1.3.

Question 1: What is ri, the required rate of return on Stock i ?

Question 2: Now suppose that rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri ?

Question 3: Now assume that 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 ?

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Finance Basics: Problem on required rate of return on stock
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