An advantage to using the SML approach for calculating the cost of equity it that this approach explicitly accounts for risk.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) approach to calculating the cost of equity incorporates the risk-free rate, the expected market return, and the beta of the security, which measures the stock's risk relative to the market, thus explicitly accounting for risk.

An Advantage to Using the SML Approach for Calculating the Cost