If investors are reasonably tolerant of risk, the Security Market Line will be relatively ﬂat.

Question

Quizplus · Accepted Answer

The Security Market Line (SML) represents the relationship between expected return and systematic risk (beta) for individual securities. If investors are tolerant of risk, they will require a higher expected return for taking on higher levels of systematic risk. This leads to a steeper SML. However, if investors are reasonably tolerant of risk, they will be willing to accept lower expected returns for lower levels of systematic risk. This leads to a relatively flat SML.

If Investors Are Reasonably Tolerant of Risk, the Security Market