The Security Market Line defines the required rate of return for a security to be worth buying or holding. The line, depicted in blue in the graph, is the sum of the risk-free return (rf in the slider) and a risk premium determined by the market-risk premium (RPM) multiplied by the security's beta coefficient for risk. Drag the slider below the graph to change the relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor to evaluate securities with different beta coefficients. In this graph, the risk-free return is fixed at 6%. r = r_{RF} + RP_M * beta = 6\% + 5\% * 1 = 6\% + 5.00\% = 11.00\%r=rRF+RPM∗beta=6%+5%∗1=6%+5.00%=11.00% 1. If the market-risk premium were 4% and a security's beta coefficient were 2.0, what would be the required rate of return for the security? (The risk-free return is fixed at 6% in this graph.) 4% 6% 10% 14% 2. If the market-risk premium doubles (say, from 4% to 8%), the required rate of return for a security more than doubles exactly doubles increases by less than double decreases
The Security Market Line defines the required rate of return for a security to be worth buying or holding. The line, depicted in blue in the graph, is the sum of the risk-free return (rf in the slider) and a risk premium determined by the market-risk premium (RPM) multiplied by the security's beta coefficient for risk. Drag the slider below the graph to change the relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor to evaluate securities with different beta coefficients. In this graph, the risk-free return is fixed at 6%. r = r_{RF} + RP_M * beta = 6\% + 5\% * 1 = 6\% + 5.00\% = 11.00\%r=rRF+RPM∗beta=6%+5%∗1=6%+5.00%=11.00% 1. If the market-risk premium were 4% and a security's beta coefficient were 2.0, what would be the required rate of return for the security? (The risk-free return is fixed at 6% in this graph.) 4% 6% 10% 14% 2. If the market-risk premium doubles (say, from 4% to 8%), the required rate of return for a security more than doubles exactly doubles increases by less than double decreases
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Exploring Finance: The Security Market Line and Risk Premium Changes
Security Market Line: Risk Premium Changes
Conceptual Overview: Explore how risk premium changes affect the security market line.
The Security Market Line defines the required
r = r_{RF} + RP_M * beta = 6\% + 5\% * 1 = 6\% + 5.00\% = 11.00\%r=rRF+RPM∗beta=6%+5%∗1=6%+5.00%=11.00%
1. If the market-risk premium were 4% and a security's beta coefficient were 2.0, what would be the required rate of return for the security? (The risk-free return is fixed at 6% in this graph.)
- 4%
- 6%
- 10%
- 14%
2. If the market-risk premium doubles (say, from 4% to 8%), the required rate of return for a security
- more than doubles
- exactly doubles
- increases by less than double
- decreases
Transcribed Image Text:Req. Rate of Return
20
15
1%
Risk Premium = 5.00%
10
Risk-Free Return = 6 0%
5-
00
05
10
10
15
20
2.
Beta Coofficient
RPM = 5
8.
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