The security market line (SML)is the graph of
A)expected rate of return on investment vs. variance of returns.
B)expected rate of return on investment vs. standard deviation of returns.
C)expected rate of return on investment vs. beta.
D)expected rate of return on investment vs. average returns.

Question

Quizplus · Accepted Answer

The SML is a graphical representation of the capital asset pricing model (CAPM), which shows the relationship between expected rate of return on an investment and its beta. Beta is a measure of the systematic risk of an investment, which is its sensitivity to market movements. The SML plots the expected return of an investment against its beta, with the y-axis representing the expected return and the x-axis representing the beta. The SML shows the minimum expected return required by investors for each level of risk, as determined by the market portfolio. Therefore, a higher beta investment would be expected to have a higher expected rate of return, while a lower beta investment should have a lower expected rate of return. Choices A, B, and D do not accurately describe the SML.

The Security Market Line (SML)is the Graph of