The risk-free rate is currently 7%, and the market return is 12%. Assume you are considering the following investments.
Investment Beta
A ............. 1.5
B ............. 1.0
C ............. 0.75
D ............. 0.0
E ............. 2.0
a. Which investment is most risky? Least risky?
b. Use the capital asset pricing model to find the required return on each of the investments.
c. Using your findings in part b, draw the security market line.
d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.