a) Sketch the security market line (SML) and interpret the slope of the SML. Explain b) Show graphically what happens to the SML if there is simultaneous (i) deflation in the c) A regulator is assessing a claim from a utility company that it must set a price charge how the SML can be used to explore if a security is "over" or "under" valued. [7] economy and (ii) an increase in risk aversion. 18] to get a 10% return on a new infrastructure investment. The company has a of 1.23. The market rate of return is 7% and the risk-free rate is 2.5%. Use the CAPM cost of capital approach to test whether the regulator should allow this price to be set. How might your answer change if the utility demonstrates that the risk associated with the infrastructure is not diversifiable? [I0]