James Fromholtz from Problem is evaluating the investment posed in that problem and wants to apply his recently acquired understanding of the security market line concept to his analysis.
a. If the risk-free rate of interest is currently 2.5 percent, and the beta for the investment is 2, what is the slope of the security market line for the real estate mortgage security investment?
b. James is also considering the investment of his money in a market index fund that has an expected rate of return of 10 percent. What is the slope of the security market line (i.e., the reward-to-risk ratio) for this investment opportunity?
c. Based on your analysis of parts a and b, which investment should James take? Why?