A stock has a beta of 1.37 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?
A) 6.49 percent
B) 7.28 percent
C) 8.61 percent
D) 9.23 percent
E) 9.99 percent

Question

Quizplus · Accepted Answer

The slope of the security market line (SML) is given by the formula:
SML slope = [E(Rm) - Rf] / β
where E(Rm) is the expected return on the market portfolio, Rf is the risk-free rate, and β is the beta of the stock.

We are given that β = 1.37, E(R) = 16.6%, and Rf = 4.8%. Rearranging the formula, we have:
[E(Rm) - Rf] = SML slope * β

Substituting the values, we get:
[ E(Rm) - 4.8% ] = SML slope * 1.37
[ E(Rm) - 4.8% ] / 1.37 = SML slope

Finally, we can solve for SML slope:
SML slope = [ 16.6% - 4.8% ] / 1.37
SML slope = 8.61%

Therefore, the best choice is C.

A Stock Has a Beta of 1