Casino Brf

of the SML. This is a mistake. The slope of any straight line is equal to the “rise” divided by the “run,” or (Y1 Y0)/(X1 X0). Consider Figure 3-12. If we let Y r and X beta, and we go from the origin to b 1.0, we see that the slope is (rM rRF)/(bM bRF) (11% 6%)/(1 0) 5%. Thus, the slope of the SML is equal to (rM rRF), the market risk premium. In Figure 3-12, ri 6% 5%bi, so an increase of beta from 1.0 to 2.0 would produce a 5 percentage point increase in ri. 14 FIGURE 3-13…