The Security Market Line (SML) represents the expected return of a portfolio or security given its level of systematic risk (measured by beta) in relation to the market. The formula for the SML is:

$\text{Expected Return} = \text{Risk-Free Rate} + (\text{Beta} \times \text{Market Risk Premium})$

Given:

• Intercept (Risk-Free Rate, $R_f$) = 5%
• Slope (Market Risk Premium, $MRP$) = 7%
• Bucky Inc.’s Beta ($\beta$) = $4.0 \times 1 = 4.0$

Plugging in the values:

$\text{Expected Return} = 5 + (4 \times 7) = 5 + 28 = 33\%$

So, Bucky Inc.'s expected return is 33.00 (rounded to two decimal places).

Would you like more details on this calculation?

Additional Questions

1. How would the expected return change if the beta was 2.0 instead of 4.0?
2. What if the intercept (risk-free rate) changed to 3%—how would that affect Bucky Inc.'s return?
3. Can you describe what the slope in the SML signifies in terms of risk and return?
4. How would a negative beta influence a company’s expected return?
5. If the slope increased to 10%, what would Bucky Inc.'s expected return be?

Tip: Remember, beta measures a stock's volatility relative to the market; a beta greater than 1 implies higher risk and potential reward.