Required Rate of Return (%) SML: - PAF+ (-A) High = 17 Picture 2: CAPM formula and picture r. = r;+ B. (rm-re) A = 11 Relatively Risky Stock's Risk Premium: 12% Where: Risk Free Rate B.-Beta of the security - Expected Market Return Flow 8 Safe Stock Risk Premium: 3% Market (Average Stock) Risk Premium: 6% TRF-5 Risk-Free Rate: 5% 0 0.5 1.0 1.5 2.0 Risk, + 0 7. The (rm- rf) in the formula represents the extent to which the returns on a given stock move with the stock market