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Security Market Line

F

FFactory0x

Diamond Member
How would you draw a SML with T0 and T1 labeled and all points labeled.

The t-bill (rf rate) = 4%

factors in place.
Economy growing
overall inflation increasing
fed increasing interest rates
corperate earnings strong (current time t0)

Fed keeps increasing interest thus increasing cost of capital
companies post pos earnings and hite more workers (t1 future)

Thats all the info given. Whats beta or is there one. Does this graph look right?

DO I NEED 1 LINE OR 2???

Do I need the 2nd line to show a shift or no ?

marketline01.JPG

 
I don't think CAPM applies here...what kind of factor model are you using?? Sounds like you've moved beyond Fama-French. Honestly, I'm not the guy to ask, because I think I just failed my investments exam tonight (and this was just the beginner class with CAPM, APT, options & derivative instruments and other basic stuff.
 
It sounds like what you're asking requires a general answer (i.e. just a diagram without specific numbers.) Perhaps you can do a regression in Excel using estimates for the factors you've listed, and then use that to get an idea of what the diagram should look like?

It might help if you define the equation first, something like E(r) = rf + B1(GDP) + B2(Inflation) + B3(rate) + B4(Earnings) etc. where 'B' is each factor's Beta.

edit: Are you just trying to draw the SML or do you also need to draw some sort of efficient frontier of portfolios?
 
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