The CEO wants an update on risk and feels believes the best way to do this is to discuss the relationship between risk and return and explain it in the context of the company's cost of capital.
Here is the information that we have:
The company's beta is 1.2.
The risk-free rate is 3%.
The required market return is 8%.
calculate the SML and discuss the pros and cons of using this measure.
I need a graph but am unsure how to proceed
Determine the relationship between risk and return by calculating stock and portfolio variance and understanding the security market line.
The response addresses the queries posted in 481 words.
// To understand the concept of Cost of Capital in a Company; it is necessary to have an update on risk and also recognize the relationship between risk and return in context to the Company. This relationship has been explored, based on the calculation of stock and portfolio variance and by understanding the security market line in the following manner: //
The SML equation is given by:
Re = Rf + (Rm - R f) β e
= 3 + (8- 3) *1.2
SML is a unique technique for calculation of expected return which incorporates ...
About 350 words of fully illustrated solution.