Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Concept explainers

Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for …
Question
**Educational Content on Required Return and the Security Market Line (SML)** --- **Given the SML in the attached file, how much is the required return for a firm with a beta of 1.7?** ### Supporting Materials #### Graph Explanation: - **Title:** (Not labeled) - **X-Axis:** Beta (β) - **Y-Axis:** Return (%) - **Graph Details:** - The graph illustrates the Security Market Line (SML), which depicts the relationship between beta (risk) and the expected return. - The line is upward sloping, indicating higher returns for higher risk (beta). - Key Points: - At beta = 0, return is 5%. - At beta = 1, return is 10%. - At beta = 2, return is 15%. #### Multiple Choice Options: - None of the above - 14% - 12.5% - 13.5% **Analysis:** To find the required return for a firm with a beta of 1.7, draw a line upward from the 1.7 mark on the x-axis until it intersects with the SML, then extend horizontally to the y-axis to determine the return percentage. **Conclusion:** Based on the position of beta and the SML slope in the graph, the required return would be a value close to 13.5%.
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Transcribed Image Text:**Educational Content on Required Return and the Security Market Line (SML)** --- **Given the SML in the attached file, how much is the required return for a firm with a beta of 1.7?** ### Supporting Materials #### Graph Explanation: - **Title:** (Not labeled) - **X-Axis:** Beta (β) - **Y-Axis:** Return (%) - **Graph Details:** - The graph illustrates the Security Market Line (SML), which depicts the relationship between beta (risk) and the expected return. - The line is upward sloping, indicating higher returns for higher risk (beta). - Key Points: - At beta = 0, return is 5%. - At beta = 1, return is 10%. - At beta = 2, return is 15%. #### Multiple Choice Options: - None of the above - 14% - 12.5% - 13.5% **Analysis:** To find the required return for a firm with a beta of 1.7, draw a line upward from the 1.7 mark on the x-axis until it intersects with the SML, then extend horizontally to the y-axis to determine the return percentage. **Conclusion:** Based on the position of beta and the SML slope in the graph, the required return would be a value close to 13.5%.
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