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

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

    a) What is ri, the required rate of return on Stock i ?

    b) 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 ?

    c) 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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    Solution Preview

    a) Using CAPm
    ri = rRF + (rM-rRF) beta
    ri = 9% + (14%-9%) 1.3 = 15.5%

    b) If the slope remains ...

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    This solution contains a detailed explanation of how to calculate the required rate of return on stocks.

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