According to the capital asset pricing model, in equilibrium ________.
A) all securities' returns must lie below the capital market line
B) all securities' returns must lie on the security market line
C) the slope of the security market line must be less than the market risk premium
D) any security with a beta of 1 must have an excess return of zero

Question

Quizplus · Accepted Answer

According to the capital asset pricing model, in equilibrium, all securities' returns must lie on the security market line (SML), which measures the expected return of a security as a function of its beta (systematic risk). The SML is derived from the capital market line (CML), which represents the efficient frontier of risky assets. Therefore, choice B is correct as it aligns with the CAPM theory. Choices A, C, and D are incorrect as they contradict the CAPM theory.

According to the Capital Asset Pricing Model, in Equilibrium ________