Which of the following statements is most correct?
A) Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
B) Portfolio diversification reduces the variability of returns on an individual stock.
C) When company-specific risk has been diversified, the inherent risk that remains is market risk which is constant for all securities in the market.
D) A stock with a beta of -1.0 has zero market risk.
E) The SML relates required returns to firms' market risk. The slope and intercept of this line cannot be controlled by the financial manager.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM), which shows the relationship between the expected return of a security and its market risk (beta). The slope and intercept of the SML are determined by market conditions and investor expectations, not by financial managers.

Which of the Following Statements Is Most Correct