Question

American Paper Company has a beta of 1.2. The risk-free rate is 6 percent and the required return on the market is 14 percent. The required rate of return on the security is

Answer 1

American Paper Company has a beta of 1.2. The risk-free rate is 6 percent and the required return on the market is 14 percent. The required rate of return on the security is:

• -15.6%
• -13.2%
• -22.0%
• -22.8%

What Is the Security Market Line?

The security market line (SML) is a line drawn on a chart that serves as a graphical representation of the capital asset pricing model (CAPM)—which shows different levels of systematic, or market risk, of various marketable securities, plotted against the expected return of the entire market at any given time.

Its Also known as the "characteristic line," the SML is a visualization of the CAPM, where the x-axis of the chart represents risk (in terms of beta), and the y-axis of the chart represents expected return. The market risk premium of a given security is determined by where it is plotted on the chart relative to the SML

The formula for plotting the SML is:

Required return = risk-free rate of return + beta (market return - risk-free rate of return)

Learn more about SML on:

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