Which of the following statements about the difference between the SML and the CML is true?
A)The intercept of the CML is the origin,whereas the intercept of the SML is RF.
B)The CML applies to efficient portfolios,whereas the SML applies to all
Portfolios or securities.
C)The CML can be downward sloping,whereas that is impossible for the SML.
D)The CML and the SML are essentially the same except for the price of risk.

Question

Quizplus · Accepted Answer

The CML only applies to efficient portfolios, meaning those portfolios that offer the highest expected return for a given level of risk. On the other hand, the SML applies to all portfolios or securities. Therefore, option B is the only statement that accurately characterizes the difference between the two models. Option A is incorrect because the SML intercepts at the risk-free rate while the CML does not intercept at the origin. Option C is also incorrect because the CML is always upward sloping, while the SML can be downward sloping if the market is anticipating lower future returns. Option D is incorrect because although both models incorporate the concept of risk and expected return, they differ not only in the price of risk but also in the fundamental assumptions they make about the market and the securities being evaluated.

Which of the Following Statements About the Difference Between the SML