The Security Market Line (SML) provides the relationship between risk and required rate of return. Which...

The Security Market Line (SML) provides the relationship between risk and required rate of return. Which of the following statements about the SML is most correct?

A	The relevant risk is portfolio risk, which is measured by beta.

B	The relevant risk is total risk, which is measured by standard deviation.

C	The relevant risk is mutual risk, which is measured by coefficient of variation.

D	The SML is an equation, but it cannot be graphed.

E	The SML is a graphed line, but it cannot be expressed as an equation.

Solutions

Expert Solution

Correct option is A - Relevant risk is portfolio risk, which is given by beta.

When plotting the SML, the y-axis represents the expected return and the x-axis represents the risk, i.e., beta.

SML equation is the same as CAPM method which involves beta -

Expected return (ER_i) = Risk free rate (Rf) + Beta x [ Expected return of market (ER_m) - Risk free rate (Rf) ]

jeff jeffy answered 2 years ago

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