Which of the following statements is most correct?
A) The slope of the security market line is beta.
B) The slope of the security market line is the market risk premium, (rM - rRF).
C) If you double a company's beta its required return more than doubles.
D) Statements a and c are correct.
E) Statements b and c are correct.

Question

Quizplus · Accepted Answer

The slope of the security market line measures the market risk premium, which is the additional return an investor expects to receive for taking on the risk of investing in the overall market. Statement A is incorrect because the slope only measures the market risk premium, not the beta of an individual security. Statement C is also incorrect because doubling the beta of a security will result in a more than proportional increase in its required return, but not necessarily a doubling of the required return.

Which of the Following Statements Is Most Correct