A stock has a beta of 1.2 and an expected return of 12%. The market is expected to yield 11%. What is the security market line intercept point?
A) 0%
B) 1.20%
C) 3.5%
D) 5.00%
E) 6.00%

Question

Quizplus · Accepted Answer

The intercept point of the security market line is the risk-free rate. Using the Capital Asset Pricing Model (CAPM), the expected return = risk-free rate + beta * (market return - risk-free rate). Solving for the risk-free rate using the given data: 12% = risk-free rate + 1.2 * (11% - risk-free rate). Solving this equation gives a risk-free rate of 6%.

A Stock Has a Beta of 1