Chapter $11$: Slope of SML

Assume that the return of the market is $10\%$ and the risk$-$free rate is $4\%.$ Thus, the slope of

the Security Market Line is $6\%.$

Assume that you have three stocks to choose from, the theory of CAPM is correct and you

want the highest excess return per unit of risk. Which security do you BUY?

Hint: Remember problem $5$ of the homework. You want to buy the stock that is

undervalued, which is also the one that has the highest expected return above the required

return calculated with CAPM. You can also determine the answer by determining which

has the highest slope $($extra return over the risk$-$free rate per unit of risk$),$ as discussed on

slides $14-16.$

A

$C$

B