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 (rf 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 slider below the graph to change the amount of the risk-free return. These changes reflect changes in inflation. Drag left or right on the graph to move the cursor to evaluate securities with different beta coefficients. In this graph, the market-risk premium is fixed at 6%.

r = r_{RF} + RP_M * beta = 6\% + 5\% * 0.8 = 6\% + 4.00\% = 10.00\%r=rRF+RPMbeta=6%+5%1=6%+5.00%=11.00%

1. If the risk-free return were 4.0% and a security's beta coefficient were 2.0, what would be the required rate of return for the security?

2. If the market-risk premium doubles (say, from 4% to 8%), the required rate of return for a security would:

A. more than doubles

B. exactly doubles

C. increases by less than double

D. decreases