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