Which of the following statements about the security market line (SML) and investor's risk aversion is correct?
A) The steeper the slope of the line, the lesser the average investor's risk aversion, and thus the greater the return investors require as compensation for risk.
B) The steeper the slope of the line, the greater the average investor's risk aversion, and thus the greater the return investors require as compensation for risk.
C) The steeper the slope of the line, the lesser the average investor's risk aversion, and thus the lesser the return investors require as compensation for risk.
D) The steeper the slope of the line, the greater the average investor's risk aversion, and thus the lesser the return investors require as compensation for risk.
E) The less steep the slope of the line, the greater the average investor's risk aversion, and thus the lesser the return investors require as compensation for risk.

Question

Quizplus · Accepted Answer

The security market line (SML) represents the expected return of a security at a given level of systematic risk. The slope of the SML is determined by the market risk premium and reflects the degree of risk aversion of the average investor. Therefore, the steeper the slope of the line, the greater the average investor's risk aversion and the greater the return investors require as compensation for risk.

Which of the Following Statements About the Security Market Line