Kelvin Inc. has required return of 15% and a beta of 2. If the risk-free rate is 3%, calculate the slope of the SML.
A)0.6%
B)1.2%
C)3.0%
D)4.0%
E)6.0%

Question

Quizplus · Accepted Answer

The slope of the Security Market Line (SML) is calculated using the formula for the Capital Asset Pricing Model (CAPM), which is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). The slope is represented by the term Beta * (Market Return - Risk-Free Rate), which is the difference between the expected return and the risk-free rate, divided by the beta. Given that Kelvin Inc. has a required return of 15%, a beta of 2, and the risk-free rate is 3%, we can rearrange the CAPM formula to solve for the market return: 15% = 3% + 2 * (Market Return - 3%). Solving for the slope directly, we use the given information: the required return minus the risk-free rate, divided by the beta, which gives us (15% - 3%) / 2 = 12% / 2 = 6%. Therefore, the slope of the SML is 6.0%.