The security market line can be used to determine the expected return on a security if we know the:
A) unsystematic risk for the past three years
B) systematic risk of that security for the next three years
C) market risk premium at the end of the next year
D) risk-free rate

Question

Quizplus · Accepted Answer

The security market line is a representation of the relationship between a security's systematic risk (beta) and its expected return. The formula for the security market line is: 
Expected return = risk-free rate + (market risk premium * beta)
Therefore, to determine the expected return on a security using the security market line, we need to know the risk-free rate (which is typically a government bond yield) and the security's beta (which measures its sensitivity to changes in the overall market). Option D is the only choice that provides the necessary information to use the security market line formula.

The Security Market Line Can Be Used to Determine the Expected