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10 April, 03:33

A stock has a beta of 1.32 and an expected return of 12.8 percent. The risk-free rate is 3.6 percent. What is the slope of the security market line?

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  1. 10 April, 04:02
    0
    6.97%

    Explanation:

    In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    12.8% = 3.6% + 1.32 * (Market rate of return - 3.6%)

    12.8% - 3.6% = 1.32 * (Market rate of return - 3.6%)

    9.2% : 1.32 = (Market rate of return - 3.6%)

    So, (Market rate of return - 3.6%) would be 6.97%

    The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.
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