Response to the following problem:
The risk-free rate is currently 7%, and the market return is 12%. Assume you are considering the following investments.
Investment Vehicle Beta
A 1.50
B 1.00
C 0.75
D 0
E 2.00
a. Which vehicle is most risky? Least risky?
b. Use the capital asset pricing model (CAPM) to find the required return on each of the investment vehicles.
c. Draw the security market line (SML), using your findings in part b.
d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.