The slope of the security market line is a reflection of the risk tolerance or level of risk aversion of the investment community. As the line becomes steeper, investors become more risk averse and demand higher risk premiums.

Question

Quizplus · Accepted Answer

The statement is true. The slope of the security market line (SML) represents the market's risk premium, which is the additional return investors demand for taking on the risk of investing in a particular security. A steeper SML indicates that investors require higher risk premiums for accepting additional risk, which implies greater risk aversion. Conversely, a flatter SML indicates that investors are more willing to take on risk for a lower expected return, reflecting lower risk aversion.

The Slope of the Security Market Line Is a Reflection