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 lower 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 lower the average investor's risk aversion, and thus the lower 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 lower 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 lower the return investors require as compensation for risk.

Question

Quizplus · Accepted Answer

The security market line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM) which shows the expected return of an investment based on its level of risk. The SML has a positive slope, indicating that as the level of risk increases, the expected return also increases. The slope of the SML is determined by the market risk premium, which is the difference between the expected return on the market and the risk-free rate. The greater the market risk premium, the steeper the slope of the SML. Investor's risk aversion is measured by the degree to which they are willing to accept risk for a given level of return. The steeper the slope of the SML, the greater the expected return for a given level of risk, indicating that investors are more risk-averse and require a higher return to compensate for the additional risk. Therefore, choice B is correct.

Which of the Following Statements About the Security Market Line