Homework Answers
a) The security Market Line is based on following CAPM equation
E(Ri)=Ri+ 
i* (E (Rm)-
Rf)
where E(Ri) is expected return of security , Rf is risk free
rate , i
security beta coefficient and E(Rm) is an expected market
return.
The slope of the SML is market risk premium. The Y intercept of SML Line is Beta cofficient.
b) Alpha 
= E(Ri)-Ri-
(i* (E (Rm)-
Rf))
Alpha of Asset A = .021-.03- ((-.1)*(0.1-.03)
= -0.20%
Alpha of Asset B = 0.142- .03- ((1.6)*(0.1-.03)
= 0.00%
Alpha of Asset C = 0.06- .03- ((.4)*(0.1-.03)
= .20%
Asset A- Overpriced
Asset B - Fairly Priced
Asset C - Underpriced
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