The answer to Security Market Line (SML)

Assume that the risk-free rate, is currently 9% and that the market return is currently 13%.

a. Draw the security market line(SML) on a set of "nondiversifiable risk (x-axis) required return (y-axis)" axes.
b. Calculate and label the market risk premium on the axis in part a.
c. Given the previous data, calculate the required return on asset A having a beta of .80 and asset B having a beta of 1.30.
d. Draw in the betas and required returns from part c for assets A and B on the axes in part a. Label the risk premium associated with each of these assets,and discuss them.

Solution Summary

Draw the security market line (SML) and calculates and lablels the market risk premium.