Problem: Assume that the risk-free rate, is currently 9% and that the market return is currently 13%.
1) Draw the security market line(SML) on a set of "nondiversifiable risk (x-axis) required return (y-axis)" axes.
2) Calculate and label the market risk premium on the axis in part a.
3) Given the previous data, calculate the required return on asset A having a beta of .80 and asset B having a beta of 1.30.
4) Draw in the betas and required returns from part c for assets A and B on the axes in part a. Label the risk premium associated with each of these assets,and discuss them.