Which of the following is false about the security market line (SML) derived from the APT?
A) The SML has an upward slope.
B) The SML for the APT shows expected return in relation to factor intensity.
C) The SML for the APT has an intercept that does not equal the expected return on the market portfolio.
D) The benchmark portfolio for the SML may be any well-diversified portfolio.
E) The SML has a downward slope, shows expected return in relation to portfolio standard deviation, and has an intercept equal to the expected return on the market portfolio.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) derived from the Arbitrage Pricing Theory (APT) indeed has an upward slope, indicating that higher expected returns come with higher levels of risk (factor intensity), not portfolio standard deviation as E suggests. The intercept of the SML in the APT context does not necessarily equal the expected return on the market portfolio, and the benchmark portfolio can indeed be any well-diversified portfolio, not just the market portfolio. Therefore, E is false because it inaccurately describes the characteristics of the SML in the context of APT.

Which of the Following Is False About the Security Market