Question

Draw the SML graph, and indicate the region where you can find the most attractive investments. Also indicate the area where the least attractive investments are located. Be sure to label the axes and other parts of the graph.

Answer 1

The security market line shows the linear relationship between Systematic risk (which is non –diversifiable, and affects the market as a whole) and expected return of the entire financial market. It signifies the relationship between expected returns and beta, on which both portfolios and individual securities line.

These are typically depicted when Expected returns and Beta Coefficients are plotted across a graph.

The x-axis represents the risk or Beta and y-axis represents the expected returns.

Above SML line indicated that stock yielding higher than expected return.

Below SML line indicated that stock yielding lower than expected return.

On SML line indicated that stock yielding equivalent to expected return.

In question asking attractive investments:

So attractive investments we assumed as undervalued stocks and least attractive investments is risk free return and overvalued stocks.

In SML LINE above dotted line indicates attractive investments and below dotted line indicates least attractive investments.

In question asking SML LINE GRAPH:

In SML line graph showing only relation between expected return and risk, so it's possible only link attractive investments to risk and return to answer the question...