Question

3. Assume that the risk-free rate is 4 percent and that the market return is currently 7.5% a. Draw the SML b. Calculate and label the MRP. C. Given the data above, calculate the required return on Asset A with a beta of 1.3. d. Indicate Asset A on your graph

Complete showing all work (formulas, calc key strokes) for question #3

Answer 1

Security Market Line 2,11 Expected Return Expected Return 0.5 1 1.5 2 2.5 Beta

Rf	Rm	B	Required Rate of Return	Market Risk Premium
4	7.5	0	4	0
4	7.5	0.5	5.75	1.75
4	7.5	1	7.5	3.5
4	7.5	1.5	9.25	5.25
4	7.5	2	11	7

Ans. C: If Beta is 1.3

Security Market Line 2,11 Expected Return Market Risk Premium (MRP) Required Rate of Return 0.5 1 1.5 2 2.5 Beta

Minimum Required rate of Return = Rf + (Rm-Rf)*Beta

                                                  = 4 + (7.5-4)*1.3 = 8.55%

Ans. D

Security Market Line Undervalued Security 1.5,9.25 Asset A Expected Return Overvalued Security Required Rate of Return O 0.5 1 1.5 2 2.5 Beta