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Conceptual Overview: Explore the determinants of the security market line. A-Z The Secunty Market Line defines the required rate of return for a security to

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Conceptual Overview: Explore the determinants of the security market line. A-Z The Secunty Market Line defines the required rate of return for a security to be worth buying or holding. The line, depicted in blue in the graph, is the sum of the risk- free return (f in the slider) and a risk premium determined by the market-risk premium (RPM) multiplied by the security's beta coefficient for risk. Drag the rf slider below the graph to change the amount of the risk-free return. These changes reflect changes in inflation. Drag the RPM slider below the graph to change the relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor line to evaluate securities with different beta coefficients 2 r = FRF + RPM beta= 6% +5% 16% +5.00% = 11.00% C Floq Rate of Return tory 15- Risk Premium 5.00% 10- Sis Risk-Free Return-0.0% 9 1 NO - d Tools 35 S ictory Ch 08: Exploring Finance Visualizations- Security Market Line 1. For a risk-free return rate of 5%, a market risk premium of 6%, what is the required rate of return for a security with a beta coefficient of 1.57 a. 5% b. 9% c. 14% d. cannot be determined 2. Changing the risk-free return (inflation) a. Changes neither the y-intercept nor the slope of the security market line b. Changes only the y-intercept of the security market line c. Changes only the slope of the security market line d. Changes both the y-intercept and the slope of the security market line 3. Changing the market risk premium - a. Changes neither the y-intercept nor the slope of the security market line b. Changes only the y-intercept of the security market line c. Changes only the slope of the security market line d. Changes both the y-intercept and the slope of the security market line -Select- 4. True or False: If a company's beta doubles, its required return doubles. a. True b. False -Select

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