Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, 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 axes in part a.
c. Given the previous data, calculate the required return on asset A having a beta of 0.80 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.