The SML is 7% + 6% (Beta). Your stock has a Beta of .9 and an implied rate of return of 15%. Your stock

Question

Quizplus · Accepted Answer

The Security Market Line (SML) equation is given as the risk-free rate plus the product of the stock's beta and the market risk premium. Here, the SML is 7% + 6%(Beta). For a stock with a Beta of .9, its expected return according to the SML would be 7% + 6%(.9) = 7% + 5.4% = 12.4%. Since the stock's implied rate of return is 15%, it is performing better than expected by 2.6% (15% - 12.4%), indicating a positive alpha of 2.6%.

The SML Is 7% + 6% (Beta)