Relationship Between the SML and the Characteristic Line elaborate Market Efficiency elaborate

Relationship Between the SML and the Characteristic Line elaborate

Market Efficiency elaborate

Expert Solution

The SML is also known as the Characteristics Line.

The characteristics line, is a line formed after performing a regression analysis that provides a summary of the risk and the return of a particular security. The y- axis measures the excess return and the x -axis measures market return in excess of risk free rate. The slope of this line, measures the beta of the security. It is also known as the security characteristics line.

Market efficiency is a concept which states that the security prices reflect all available market information.

There are 3 forms of market efficiency together they constitute the efficient markets :

weak form : We cannot predict the future prices base don the past prices, the past prices cannot accurately predict the future prices.
semi strong: this form of market efficiency assumes that markets reflects all publicly available information quickly.
strong form: this is the strongest version of market efficiency, all the information weather public or private even the insider information is reflected in the stock price.

jeff jeffy answered 1 year ago

The security market line (SML) is an equation that shows the relationship between risk as measured...

The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: If a stock's expected return plots on or above the SML, then the stock's return is (-Select- insufficient, sufficient) to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is (-Select- insufficient, sufficient) to compensate the investor for...

The CAPM’s Security Market Line (SML) equation examines the relationship between a security’s market risk and...

The CAPM’s Security Market Line (SML) equation examines the relationship between a security’s market risk and its required rate-of-return. Explain the importance of this relationship from a Finance Management perspective. Explain how market perceptions of risk affect the required rate of return on investment. Explain with examples.

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...

what are the differences between the Capital Allocation Line (CAL) and Security Market Line (SML)? How...

what are the differences between the Capital Allocation Line (CAL) and Security Market Line (SML)? How could we use them? Please provide examples.

Elaborate on the three forms of market efficiency.

Using the properties of the capital market line (CML) and the security market line (SML), determine...

Using the properties of the capital market line (CML) and the security market line (SML), determine which of the following scenarios are consistent or inconsistent with the CAPM. Explain your answers. Let A denote arbitrary securities while F and M represent the riskless asset and the market portfolio respectively. a. Security E[R] σ(R) A 25% 30% M 15% 30% b. Security E[R] σ(R) A 25% 55% F 5% 0% M 15% 30%

Explain marginal cost. Elaborate on the relationship between the two. Elaborate the relationship between marginal cost...

Explain marginal cost. Elaborate on the relationship between the two. Elaborate the relationship between marginal cost and average cost.

You find an asset that does not lie on the security market line (SML). Is there...

You find an asset that does not lie on the security market line (SML). Is there an arbitrage opportunity? Explain, with reference to Arbitrage Pricing Theory.

Draw the Security Market Line (SML) and plot Asset C such that it has less risk...

Draw the Security Market Line (SML) and plot Asset C such that it has less risk than the market but plots above the SML, and Asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio and risk-free returns are on your graph and provide the formula and the slope of the SML.) Explain how Assets C or D can plot as they do and explain why...

Explain the Implications of the CAPM. Explain the Security Market Line (SML). Explain the Two-Factor...

Explain the Implications of the CAPM. Explain the Security Market Line (SML). Explain the Two-Factor model by Merton.

Question