X Ch 08: Exploring Finance Visualizations - The Security Market Line and Risk Premium Changes Conceptual Overview: Explore how risk premium changes affect the security market line. The Security Market Line defines the required rate 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 relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor to evaluate securities with different beta coefficients. In this graph, the risk-free retun is fixed at 6 % 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 A-A 6%5% 1 = 6% + 5.00% = 11.00% r = rRF + RPM* beta = Req. Rate of Return 15 . 11% Risk Premium 5.00 % 10 15- A-Z 11% Risk Premium = 5.00 % 10. goe Risk-Free Return 6.0 % 2.0 2.5 1.5 0.5 1.0 0,0 Beta Coefficient RPM= 5 10 4 Ch 08: Exploring Finance Visualizations - The Security Market Line and Risk Premium Changes fixed at 6 % in this 1. If the market-risk premium were 4% and a security's beta coefficient were 2.0, what would be the required rate of return for the security? (The risk-free return graph.) 4% 6% A-Z 10% .14% Select- 2. If the market-risk premium doubles (say, from 4% to 8%), the required rate of return for a security more than doubles exactly doubles increases by less than double decreases -Select Save & Continue Continue wilhout saving