Which of the following statements is most correct?
A) The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line cannot be controlled by the financial manager.
B) The slope of the SML is determined by the value of beta.
C) If you plotted the returns of a given stock against those of the market,and you found that the slope of the regression line was negative,the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue on into the future.
D) If investors become less risk averse,the slope of the Security Market Line will increase.
E) Statements a and c are both true.

Question

Quizplus · Accepted Answer

Statement A is correct because the Security Market Line (SML) indeed relates the required returns to firms' systematic risk, and its slope (beta) and intercept (risk-free rate) are determined by market conditions, not by the financial manager. Statement C is also correct because a negative slope in the regression line between the returns of a stock and the market implies a negative beta, suggesting that the stock moves inversely to the market. According to the Capital Asset Pricing Model (CAPM), this would indeed imply a required rate of return less than the risk-free rate if the relationship continues, which is counterintuitive but mathematically possible within the model's framework.

Which of the Following Statements Is Most Correct