A. The slope of the Security Market Line is the market risk premium. The market risk premium is the difference between the return to the market and the risk-free rate. It is also the amount by which the expected return for an individual security or portfolio increases for each 1 unit increase in the security's or portfolio's beta. For a beta of 0.5, the expected return is 7.5%. For a beta of 1.5 (1.0 greater), the expected return is 16.5%. The difference, 9%, is the slope of the Security Market Line.
B. It is not impossible to determine the slope of the Security Market Line from the graph.
C. 4.5% is the amount by which the expected return increases when the beta increases by 0.5. However, the slope of the Security Market Line is the amount by which the expected return increases when the beta increases by 1.0.
D. 3% is the risk-free rate on this graph.
