The Security Market Line describes the relationship between the:
A)expected return on securities and their systematic risk
B)expected return on securities and their unsystematic risk
C)expected return on a security and the expected return on the market portfolio
D)risk-free rate and the expected return on the market portfolio

Question

Quizplus · Accepted Answer

The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM), which shows the linear relationship between the expected return of a security and its systematic or market risk. The SML is derived from the CAPM equation, which states that the expected return of a security equals the risk-free rate plus the market risk premium multiplied by the security's beta coefficient. Therefore, the SML describes the expected return on securities based on their systematic risk, and it provides a benchmark for evaluating whether an investment is fairly priced, overpriced, or underpriced.

The Security Market Line Describes the Relationship Between The