The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

Question

Quizplus · Accepted Answer

This statement is true. The security market line (SML) plots the expected return of an asset or portfolio against its beta, which represents its nondiversifiable risk. The slope of the SML represents the market risk premium, which is the excess return investors demand for taking on additional risk. Therefore, the SML reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

The Security Market Line (SML) Reflects the Required Return in the Marketplace