Which of the following statements is correct?
A)The slope of the SML is determined by the value of beta.
B)The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by managers.
C)Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors in the market expect the observed relationship to continue on into the future.
D)If investors become less risk averse, the slope of the SML will increase.

Question

Quizplus · Accepted Answer

According to CAPM, a negative slope of the regression line indicates that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors in the market expect the observed relationship to continue on into the future. Option A is incorrect because beta determines the steepness or slope of the SML. Option B is partly true, but it is not completely accurate as the intercept of the SML is determined by the risk-free rate and market risk premium, which can be influenced by macroeconomic factors or government policies. Option D is incorrect as a decrease in risk aversion of investors will lead to a decline in the slope of the SML.

Which of the Following Statements Is Correct