Mark and Sheila from Problem 8-1 are trying to apply their understanding of the security market line

Question:

Mark and Sheila from Problem 8-1 are trying to apply their understanding of the security market line concept to the analysis of their real estate investment strategy. They estimate that their portfolio will have an expected rate of return of 8.25%.

a. If the risk-free rate of interest is currently 2.5 percent and the beta for the investment is 2, what is the slope of the security market line (i.e., the reward-to-risk ratio) for the real estate mortgage security investment?

b. They are also considering the investment of their money in a market index fund that has an expected rate of return of 10 percent. What is the slope of the security market line for this investment opportunity?

c. Based on your analysis of parts a and b, which investment should they undertake? Why?

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...