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?
a.what is ri, the required
rate of return on stock i?
The answer is “15.5%”.
This is how we
calculate and find the value of ri;
Ri= (rrf + (rm– rrf)bi
Now put the values of rrf,rm
and bi;
= (9% + (14% -09%)1.3
= 15.5% 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?
1) Ri = (rrf + (rm – rrf)bi rm increases by 1% from 14 to15% Rm rrf increases to10% = 10% + (15% - 10%)(1.3) Ri = 16.5%
2) Ri = (rrf + (rm – rrf)bi
Rm decreases to 1% from 14 to13%Rm rrf decreases to 8% from 10 to8% = 10% + (13% - 8%)(1.3) Ri = 14.5%
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?
