One way to express the trade-off between risk and return for an individual security is through:
A)the security market line.
B)the beta coefficient.
C)the correlation coefficient.
D)arbitrage pricing theory.

Question

Quizplus · Accepted Answer

The security market line (SML) shows the trade-off between risk and return for an individual security. It is a graphical representation of the capital asset pricing model (CAPM) which states that the expected return of a security is equal to the risk-free rate plus a risk premium that is proportional to the market risk premium and the security's beta coefficient. As the beta coefficient of a security increases, so does its expected return, but also its risk. Therefore, the SML helps investors evaluate whether a security is appropriately compensating them for the amount of risk they are taking on.

One Way to Express the Trade-Off Between Risk and Return