Suppose risk-free rate of Rf = 8% the market return, km is 12% and beta for asset i bi = 1.2

Specify the variables on the x and y axes of the Security Market Line SML and show what the vertical intercept and slope of the SML are.

Use CAPM to calculate the required return, ki, on stock i, and explain if stock i is above or below the SML if the forecasted return of the stock is 13%. Also, explain if the stock is under or overvalued.

Assume that as a result of recent events, investors have become less risk-averse, causing the market return to decrease by 2% to 10%. Explain how this would cause the SML to change and calculate the new required return for asset i.

Now assume that km remains at 12% but Rf increases to 9% due to expected inflation. Explain how this would cause the SML to change and calculate the new required return for asset i.