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market rate of return - Assignment Example
Author : kattielang
Finance & Accounting
Pages 3 (753 words)
The security market line (SML) Determination of the y-intercept and the slope of the security market line by running a regression line (appendix); after running a regression line the slope is 8.375 and the y intercept is -0.166 Interpretation of my regression, this includes what the y-intercept and the slope mean in terms we have used in this class…
If it is observed that the returns are consistently below the SML line, it will mean that the stock is expected to rise, while if the returns are seen to be consistently above the line, then it will mean that the stock is due for a drop. Graphing the SML for a particular stock requires a stock with a beta that is higher than 1 and this usually outperforms the market, while a beta that is less than 1 implies that it underperforms the market (Shanken, 56). The y-intercept of the SML is equal to risk-free rate. The SML slope is equal to market risk premium and it usually reflects the return trade of a given time. Beta is termed as non-diversifiable or systematic risk. Basing on the generated regression line the equation created is=8.375x-0.166 Going by beta values, the security market line indicates that the relationship between return and risk is linear for the individual securities. For instance, increased return= increased risk. Essentially it indicates what return someone needs to earn on an investment for it to be worth taking, and this is seen to increase with the investment riskiness. ...