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 ?© BrainMass Inc. brainmass.com June 4, 2020, 1:03 am ad1c9bdddf
a) Using CAPm
ri = rRF + (rM-rRF) beta
ri = 9% + (14%-9%) 1.3 = 15.5%
b) If the slope remains ...
This solution contains a detailed explanation of how to calculate the required rate of return on stocks.