# CAPM Model

A regression was run between Stock B and the market proxy portfolio, the S&P 500. The regression line is defined as: Y = 8.3 + 1.2X. If the risk-free rate is 4 percent, the market risk premium is 6 percent, and the market return on Stock B is 10.5 percent,

(a) graph the security market line (SML) for Stock B.

(b) determine if Stock B is overpriced, under-priced, or in equilibrium with the Capital Asset Pricing Model (CAPM).

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#### Solution Preview

A regression was run between Stock B and the market proxy portfolio, the S&P 500. The regression line is defined as: Y = 8.3 + 1.2X. If the risk-free rate is 4 percent, the market risk premium is 6 percent, and the market return on Stock B is 10.5 percent,

(a) Graph the security market line (SML) for Stock B.

Slope of line given ...

#### Solution Summary

CAPM Model is assessed.