Security market line (SML). 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 beta 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.