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%
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