If all securities plot on the security market line then:
A) Each security is being paid the same amount of risk premium.
B) The reward-to-risk ratio is constant and equal to the market risk premium.
C) Every security has a reward-to-risk ratio equal to its beta.
D) The slope of the security market line must be greater than the reward-to-risk ratio.
E) The reward-to-risk ratio is constant and equal to 1.0.

Question

Quizplus · Accepted Answer

The security market line (SML) represents the expected return of a security as a function of its systematic risk (beta). The slope of the SML is the market risk premium, which is the reward for bearing an additional unit of risk. Therefore, the reward-to-risk ratio for any security on the SML is constant and equal to the market risk premium, not to its beta or any other measure. This means that the risk premium per unit of risk is the same for all securities on the SML, reflecting an equilibrium state where all securities are correctly priced according to their risk levels.

If All Securities Plot on the Security Market Line Then