Refer to the graph. The intercept of the three Security Market Lines is determined by
A) the risk-free interest rate.
B) the interest rate on ﬁnancial assets with a beta of 1.
C) the rate on long-term U.S. government bonds.
D) all of these.

Question

Refer to the graph. The intercept of the three Security Market Lines is determined by
A) the risk-free interest rate. 
B) the interest rate on ﬁnancial assets with a beta of 1. 
C) the rate on long-term U.S. government bonds. 
D) all of these.

Quizplus · Accepted Answer

The intercept of the three Security Market Lines is the point where the expected return of an investment is equal to the risk-free interest rate, which represents the return investors can earn without taking on any risk. This is because all investments on the SML have some level of risk, and investors demand a higher return for taking on more risk than the risk-free rate. Therefore, the intercept is determined solely by the risk-free interest rate.

Refer to the Graph