The Security Market line (SML) shows how the average expected rates of return on assets vary with
A) stock price.
B) dividend payment.
C) risk level.
D) time preference.

Question

Quizplus · Accepted Answer

The Security Market line shows the relationship between the risk level of an asset and its expected rate of return. It indicates that assets with higher risk will have higher expected returns, while assets with lower risk will have lower expected returns. Therefore, the SML helps investors to decide whether the returns generated by the asset are sufficient to compensate for the risks taken. The SML is not related to stock price, dividend payment or time preference.

The Security Market Line (SML) Shows How the Average Expected