Required Rate of Return (%) SML: TF+ - PR - 17 Picture 2: CAPM formula and picture r.= r,+B. rm-ri) A = 11 Relatively Risky Stock's Risk Premium: 12% Where =8 Market (Average Stock) Risk Premium: 8% Safe Stock Risk Premium: 3% B. - Bota of the security - Expected Market Return 5 Risk-Free Rate: 5% 0 0.5 1.0 1.5 2.0 Risk, + 0 5. This model is used to determine the required return on an asset, which is based on the proposition that any asset's return should be equal to the risk-free return plus a risk premium that reflects the asset's nondiversifiable risk