The security market line proposes that the required rates of return are determined by the following formulation: A)k_m = k_rf + (k_x - k_rf)b_x. B)k_x = k_rf + (k_m - k_rf)b_x. C)k_rf = k_x + (k_m - k_x)b_x. D)k_x = k_rf + (k_m - k_rf)b_m.

Question

Quizplus · Accepted Answer

The security market line proposes that the required rate of return on an asset is equal to the risk-free rate plus the product of the asset's beta and the market risk premium. This can be represented as k=rf+(km-rf)×b, where k is the required rate of return, rf is the risk-free rate, km is the expected return on the market, b is the asset's beta, and km-rf is the market risk premium. Option B correctly represents this formula.

The Security Market Line Proposes That the Required Rates of Return