1. Boundless Lecture Slides Free to share, print, make copies and changes. Get yours at www.boundless.com Available on the Boundless Teaching Platform

2. Using Boundless Presentations The Appendix The appendix is for you to use to add depth and breadth to your lectures. You can simply drag and drop slides from the appendix into the main presentation to make for a richer lecture experience. Free to edit, share, and copy Feel free to edit, share, and make as many copies of the Boundless presentations as you like. We encourage you to take these presentations and make them your own. Free to share, print, make copies and changes. Get yours at www.boundless.com Boundless Teaching Platform Boundless empowers educators to engage their students with affordable, customizable textbooks and intuitive teaching tools. The free Boundless Teaching Platform gives educators the ability to customize textbooks in more than 20 subjects that align to hundreds of popular titles. Get started by using high quality Boundless books, or make switching to our platform easier by building from Boundless content pre-organized to match the assigned textbook. This platform gives educators the tools they need to assign readings and assessments, monitor student activity, and lead their classes with pre-made teaching resources. Get started now at: If you have any questions or problems please email: educators@boundless.com http://boundless.com/teaching-platform

3. Boundless is an innovative technology company making education more affordable and accessible for students everywhere. The company creates the world’s best open educational content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless integrates learning technology into all its premium books to help students study more efficiently at a fraction of the cost of traditional textbooks. The company also empowers educators to engage their students more effectively through customizable books and intuitive teaching tools as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free and premium content each month across the company’s wide distribution platforms, including its website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with Boundless, visit boundless.com.boundless.com Free to share, print, make copies and changes. Get yours at www.boundless.com About Boundless

4. Expected Risk and Risk Premium Defining the Security Market Line Impact of the SML on the Cost of Capital Understanding the Security Market Line Introduction to Risk and Return > Understanding the Security Market Line Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_82&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. In return for undertaking risk, investors expect to be compensated in such as a way as to reasonably reward them. Systemic risk is the risk associated with an entire financial system or entire market. It cannot be diversified away. Unsystematic risk is risk to which only specific classes of securities or industries are vulnerable, and with proper grouping of assets it can be reduced or even eliminated. Beta is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to -- usually the market as expressed in an index. The term risk premium refers to the amount by which an asset's expected rate of return exceeds the risk-free interest rate. Expected Risk and Risk Premium Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/understanding-the-security-market-line- 82/expected-risk-and-risk-premium-354- 5850?campaign_content=book_192_section_82&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Beta View on Boundless.com Introduction to Risk and Return > Understanding the Security Market Line

6. The security market line is the theoretical line on which all capital investments lie. Investors want higher expected returns for more risk. On a graph, the line has risk on its horizontal axis (independent variable) and expected return on the vertical axis (dependent variable). Assuming a linear relationship between risk and return, the assumption is that the y-intercept is the return on a risk-free investment (the risk free rate), and the slope is the premium on risk in terms of expected returns. Given two investments with the same expected return, investors would always choose less risk. Someone with opposite preferences might better be called a gambler. Defining the Security Market Line Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/understanding-the-security-market-line- 82/defining-the-security-market-line-355- 1866?campaign_content=book_192_section_82&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess The equation that defines the security market line. View on Boundless.com Introduction to Risk and Return > Understanding the Security Market Line

7. The security market line is a hypothetical concept that suggests that investors require compensation in the form of expected returns for the risk the investment exposes them to. A capital investment below the security market wouldn't be efficiently priced to the buyer of the investment. A higher return or lower price would be required, both increasing the cost of capital. A capital investment above the security market line wouldn't be efficiently priced for the seller or whomever raises the capital. A lower return or higher price would be necessary to justify this cost of capital for the company. Impact of the SML on the Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/understanding-the-security-market-line- 82/impact-of-the-sml-on-the-cost-of-capital-356- 3891?campaign_content=book_192_section_82&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess The Security Market Line View on Boundless.com Introduction to Risk and Return > Understanding the Security Market Line

8. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

9. Key terms beta Average sensitivity of a security's price to overall securities market prices. capital asset pricing model In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non- diversifiable risk. diversifiable risk the potential for loss which can be removed by investing in a variety of assets line of credit source of debt extended to a government, business or individual by a bank or other financial institution market risk the potential for loss due to movements in prices in a system of exchange market risk premium the amount by which expected rate of return of the exchange system exceeds the risk-free interest rate Risk free rate Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. security market line Security market line (SML) is the representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk (its beta). treasury bill Treasury bills (or T-Bills) mature in one year or less. They do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return

10. The Security Market Line This is an example of a security market line graphed. The y-intercept of this line is the risk-free rate (the ROI of an investment with beta value of 0), and the slope is the premium that the market charges for risk. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. CC BY http://upload.wikimedia.org/wikipedia/en/d/d9/SecMktLine.png View on Boundless.comCC BYhttp://upload.wikimedia.org/wikipedia/en/d/d9/SecMktLine.pngView on Boundless.com Introduction to Risk and Return

11. The Security Market Line The location of a financial instrument above, below, or on the security market line will lead to consequences for a company's cost of capital. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "SecMktLine." GNU FDL http://en.wikipedia.org/wiki/File:SecMktLine.png View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/File:SecMktLine.pngView on Boundless.com Introduction to Risk and Return

12. The equation that defines the security market line. Look at the equation and remember that old formula of a line: y = mx + b. In this case it looks rearranged, like y = b + mx, but the real question is what do the slope and y-intercept actually represent? Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Security market line." CC BY http://en.wikipedia.org/wiki/Security_market_line View on Boundless.comCC BYhttp://en.wikipedia.org/wiki/Security_market_lineView on Boundless.com Introduction to Risk and Return

13. Beta Beta is a measure that relates the rate of return of an asset, ra, with the rate of return of a benchmark, rb. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Beta (finance)." GNU FDL http://en.wikipedia.org/wiki/Beta_(finance) View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Beta_(finance)View on Boundless.com Introduction to Risk and Return

14. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return A stock has a beta of 0.75 in relation to the Dow Jones Industrial Index. Today, the Dow Jones increased by 2%. Based on its beta, predict what happened to the stock's price. A) The stock's price increased by 2%. B) The stock's price increased by more than 2%. C) The stock's price increased by less than 2%. D) The stock's price decreased by less than 2%.

15. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return A stock has a beta of 0.75 in relation to the Dow Jones Industrial Index. Today, the Dow Jones increased by 2%. Based on its beta, predict what happened to the stock's price. A) The stock's price increased by 2%. B) The stock's price increased by more than 2%. C) The stock's price increased by less than 2%. D) The stock's price decreased by less than 2%.

16. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return Which of the following statements regarding the Security Market Line (SML) is true? A) The x-intercept of the SML is equal to the risk-free interest rate. B) The SML graphs unsystematic risk C) The slope of the SML is equal to the market risk premium and reflects the risk-return trade off. D) All of these answers.

17. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return Which of the following statements regarding the Security Market Line (SML) is true? A) The x-intercept of the SML is equal to the risk-free interest rate. B) The SML graphs unsystematic risk C) The slope of the SML is equal to the market risk premium and reflects the risk-return trade off. D) All of these answers.

18. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return A company's security is priced above the security market line. Which of the following statements regarding that security is true? A) This isn't an attractive market situation for a potential investor looking to purchase the security. B) The security is fairly priced for the amount of expected return. C) This is not an attractive market situation for the company issuing the security. D) All of these answers.

19. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to Risk and Return A company's security is priced above the security market line. Which of the following statements regarding that security is true? A) This isn't an attractive market situation for a potential investor looking to purchase the security. B) The security is fairly priced for the amount of expected return. C) This is not an attractive market situation for the company issuing the security. D) All of these answers.

20. Attribution Wikipedia. "Security market line." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Security_market_lineCC BY-SA 3.0http://en.wikipedia.org/wiki/Security_market_line Wiktionary. "line of credit." CC BY-SA 3.0 http://en.wiktionary.org/wiki/line+of+creditCC BY-SA 3.0http://en.wiktionary.org/wiki/line+of+credit Wikipedia. "Risk premium." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk_premiumCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk_premium Wikipedia. "Diversification (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Diversification_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Diversification_(finance) Wikipedia. "Market risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Market_riskCC BY-SA 3.0http://en.wikipedia.org/wiki/Market_risk Wiktionary. "beta." CC BY-SA 3.0 http://en.wiktionary.org/wiki/betaCC BY-SA 3.0http://en.wiktionary.org/wiki/beta Wiktionary. "security market line." CC BY-SA 3.0 http://en.wiktionary.org/wiki/security+market+lineCC BY-SA 3.0http://en.wiktionary.org/wiki/security+market+line Wikipedia. "Security market line." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Security_market_lineCC BY-SA 3.0http://en.wikipedia.org/wiki/Security_market_line Wikipedia. "Capital asset pricing model." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_asset_pricing_modelCC BY-SA 3.0http://en.wikipedia.org/wiki/Capital_asset_pricing_model Wikipedia. "capital asset pricing model." CC BY-SA 3.0 http://en.wikipedia.org/wiki/capital%20asset%20pricing%20modelCC BY-SA 3.0http://en.wikipedia.org/wiki/capital%20asset%20pricing%20model Wikipedia. "Systemic risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Systemic_riskCC BY-SA 3.0http://en.wikipedia.org/wiki/Systemic_risk Wikipedia. "Risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/RiskCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk Wikipedia. "Security market line." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Security_market_lineCC BY-SA 3.0http://en.wikipedia.org/wiki/Security_market_line Wikipedia. "Risk premium." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk_premiumCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk_premium Wikipedia. "Beta (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Beta_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Beta_(finance) Wikipedia. "Risk-free interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk-free_interest_rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk-free_interest_rate Wikipedia. "treasury bill." CC BY-SA 3.0 http://en.wikipedia.org/wiki/treasury%20billCC BY-SA 3.0http://en.wikipedia.org/wiki/treasury%20bill Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return

21. Wikipedia. "Risk free rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk%20free%20rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk%20free%20rate Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to Risk and Return