The Security 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 (of 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 if 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. r=rRF + RPvbeta = 6% +5% * 1.5=6% +7.50% = 13.50% Req. Rate of Retum 13.50% Risk Premium = 7.50% Risk-Free Return = 6.0% 20 25 Beta Coefficient if = 6 6 10 RPM = 5 0000 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 1.5? a. 5% b. 9% c. 14% d. cannot be determined -Select- 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 -Select- 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