James Fromholtz James Fromholtz is considering whether to invest in a newly form

Question

James Fromholtz James Fromholtz is considering whether to invest in a newly formed investment fund The fund's investment objective is to acqure home mortgage securities at what it hopes wiD be bargain prices The fund sponsor has suggested to James that the fisvfs performance wiD hinge on how the national economy performs in the coming year Specifically, he suggested the following possible. outcomes James has estimated the expected rate of return from this investment is 21 00 percent James wants to apply his recently acquired understanding of the security market line concept to his analysis If the risk-free rate of interest is currently 2.2 percent and the beta for the investment is 2.0. what is the slope of the security market line for the real estate mortgage security investment? James is also considering the investment of his money in a market index find that has an expected rate of return of 11 percent What is the slope of the security market line (i.e . the reward to risk ratio) for this investment opportunity? Based on your analysis of parts a and b above, which investment should James take? Why? If the risk-free rate of interest is currently 2 2 percent and the beta for the investment is 2 0. the slope of the security market line for the real estate mortgage security investment is % (Round to two decimal places ).

Explanation / Answer

The slope of the SML = market risk premium = ( expected rate of return - risk free rate) = 21 - 2.2 = 18.8

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