Question

. Draw the Security Market Line and label the axes. Include the market risk premium in...

. Draw the Security Market Line and label the axes. Include the market risk premium in your diagram. Also include an underpriced asset.  

Please show the diagram and label it properly

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Answer #1

The Equation for the SML is: E(Ri) = Rf + βi [E(RM) – Rf]

where

  • E(Ri): Expected return on security
  • Rf: risk-free rate
  • βi : Systematic risk
  • E(RM): Expected return on market portfolio M
  • E(RM) – Rf  is known as Market Risk Premium

The graph is drawn below:

Here the underpriced assets and undervalued stock that lies above the Security Market Line.

Note: Give it a thumbs up if it helps! Thanks in advance!

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