security market line

2. Look at the Security Market Line on next page. Its positive slope and steepness comes from two points, the point where a beta of 1.0 intersects with an expected return of 12% (the stock market return), and the point where the 5% risk-free rate intersects with a beta of 0. The line can be flatter or steeper, depending on the variables. What happens to the Security Market Line if we assume a stagflation period when the expected S&P 500 Index return is 2% and the risk free rate is 8%? HINT: Draw that line on a piece of paper so you can interpret it. Security market line Market return Expected return (%) Risk-free rate 0.5 10 20 15 Beta