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natima [27]
4 years ago
6

Suppose rrf = 9%, rm = 14%, and bi= 1.3

Business
1 answer:
Morgarella [4.7K]4 years ago
8 0

rrf = 9%

rm = 14%

and bi= 1.3

 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;

<span>Ri= (rrf + (rm– rrf)bi</span>

<span> Now put the values of rrf,rm and bi;

  = (9% + (14% -09%)1.3

<span> = 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?
<span>
1) Ri = (rrf + (rm – rrf)bi</span>
<span> <span>
rm increases by 1% from 14 to15% Rm</span>
<span> <span>
rrf increases to10%</span>
<span> = 10% + (15% - 10%)(1.3)
<span>
Ri = 16.5%


 2) Ri = (rrf + (rm – rrf)bi
<span> <span>
Rm decreases to 1% from 14 to13%Rm
</span><span><span>
rrf decreases to 8% from 10 to8%
</span><span>
= 10% + (13% - 8%)(1.3)
<span>
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?

 1) ri = rrf +(rm – rrf)bi

Rm increases to16%

= 9% + (16% - 9%)(1.3)

Ri = 18.10%
   

2) ri = rrf +(rm– rrf)bi

Rm decreases to13%

= 9% + (13% - 9%)(1.3)

Ri = 14.2%
<span> </span></span></span></span></span></span></span></span></span></span></span>
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