1 PROBLEM 6-17 2 SECURITY MARKET LINE a. Determine the expected retum and beta for the portfolio below. b. Given the foregoing information, draw the security market line and show where the securities and portfolio fit on the graph. Assume that the risk-free rate is 2 percent and that the expected returm on the market portfolio is 8 percent. 6 DATA Stock % of Portfolio 40% 25% 35% Beta 1.00 0.75 1.30 12% 11% 15% 10 Risk-free beta Market beta 12 Risk-free rate 13 Market rate 14 15 SOLUTION 16 a. Determine the expected retum and beta for the portfolio above. 17 18 Portfolio return 19 Portfolio beta 20 2% 8% 0.00 1.00 b. Given the foregoing information, draw the Security Market Line and show where the securities and portfolio fit on the graph. Assume that the risk-free rate is 2 percent and that the expected return 21 on the market portfolio is 8 percent. 23 24 25 26 27 28 29 30