Refer to the graph.The intercept of the three Security Market Lines is determined by
A)the risk-free interest rate.
B)the interest rate on financial assets with a beta of 1.
C)the rate on long-term U.S.government bonds.
D)all of these.

Question

Refer to the graph.The intercept of the three Security Market Lines is determined by
A)the risk-free interest rate. 
B)the interest rate on financial assets with a beta of 1. 
C)the rate on long-term U.S.government bonds. 
D)all of these.

Quizplus · Accepted Answer

The intercept of the Security Market Line represents the expected return on an asset with zero systematic risk, which is equal to the risk-free interest rate. Therefore, the intercept of the three SMLs can only be determined by the risk-free interest rate. The interest rate on financial assets with a beta of 1 and the rate on long-term U.S. government bonds may affect the slope of the SML, but not its intercept.

Refer to the Graph