Securities A,B,C have the following;
Security Exp.Return Beta
A 10 0.7
B 14 1.2
C 20 1.8
According to CAPM, what is the correct slope between security A&B?
A&C?
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According to the Capital Asset Pricing Model (CAPM), the correct slope between two securities represents the relationship between their expected returns and their betas.
To calculate the slope between two securities, we need to use the formula:
Slope = (Return of Security B - Return of Security A) / (Beta of Security B - Beta of Security A)
Let's calculate the slopes between Security A and Security B, and between Security A and Security C.
For Security A and B:
Return of Security A = 10
Beta of Security A = 0.7
Return of Security B = 14
Beta of Security B = 1.2
Slope between Security A and B = (14 - 10) / (1.2 - 0.7) = 4 / 0.5 = 8
Therefore, the slope between Security A and B is 8.
For Security A and C:
Return of Security C = 20
Beta of Security C = 1.8
Slope between Security A and C = (20 - 10) / (1.8 - 0.7) = 10 / 1.1 ≈ 9.09
Therefore, the slope between Security A and C is approximately 9.09.
Hence, the correct slope between Security A and B is 8, and the correct slope between Security A and C is approximately 9.09.