Consider the data on expected returns and betas for a variety of assets in the table below.What is the expected return on shares of Bank of America using the SML?

A) 5.4%
B) 6.0%
C) 8.2%
D) 9.4%
E) 11.2%

Question

Consider the data on expected returns and betas for a variety of assets in the table below.What is the expected return on shares of Bank of America using the SML?

A) 5.4% 
B) 6.0% 
C) 8.2% 
D) 9.4% 
E) 11.2%

Quizplus · Accepted Answer

From the text we know that the equation for the Security Market Line, and the expected return on any security in capital market equilibrium, is: E(k_i) = k_F + β_i[E(k_M) - k_F] E(k_i) = 0.04 + 0.9(0.10 - 0.04) E(k_i) = 0.04 + 0.9(0.06) E(k_i) = 0.04 + 0.054 = 0.094 or 9.4%

Consider the Data on Expected Returns and Betas for a Variety