The security market line plots the expected return on ______________ against its ______________.
A)a portfolio,standard deviation
B)a portfolio,systematic risk
C)an individual asset,standard deviation
D)an individual asset,systematic risk

Question

Quizplus · Accepted Answer

The security market line (SML) is a graphical representation of the capital asset pricing model (CAPM), which describes the relationship between the expected return on an individual asset and its systematic risk (beta). In other words, the SML shows the required return (as determined by the market) for investing in a particular asset given its level of risk. Therefore, the expected return on an individual asset is plotted against its systematic risk, not its standard deviation or portfolio characteristics. Choice A and B are incorrect because the SML is not used to plot the expected return on a portfolio, but rather an individual asset. Choice C is incorrect because the SML is not used to plot the expected return against standard deviation.

The Security Market Line Plots the Expected Return on ______________