The yield curve is currently flat; that is, long-term Treasury


Question Description:

25

The yield curve is currently flat; that is, long-term Treasury bonds also have a 5.5% yield. Consequently, Merrill Finch assumes that the risk-free rate is 5.5%. Write out the Security Market Line (SML) equation, use it to calculate the required rate of return on each alternative, and graph the relationship between the expected and required rates of return.

Answer

25