Suppose the expected return of market is 12% while government bonds with maturities of three years offers yield to maturity as much as 5%. Assume that the market is in equilibrium. Answer the following questions.
(1) Find the security market line (SML).
(2) You have a security with beta of 1.5. Find the expected return of the security.
(3) You have a stock with beta 1.2 and estimated return of 15%. Should you invest in the stock?