10.30

a. Draw the security market line for the case where the market-risk premium is 5 percent and the risk-free rate is 7 percent.

b. Suppose that an asset has a beta of 1 and an expected return of 4 percent. Plot it on the graph you drew in part (a). Is the security properly priced? If not, explain what will happen in this market.

c. Suppose that an asset has a beta of 3 and an expected return of 20 percent. Plot it on the graph you drew in part (a). Is the security properly priced? If not, explain what will happen in this market.