The vertical intercept of the Security Market Line (SML) shows the
A) amount of arbitrage.
B) risk-free interest rate.
C) beta of the market portfolio.
D) risk premium for the market portfolio.

Question

Quizplus · Accepted Answer

The vertical intercept of the SML represents the risk-free rate of return, which is the return on an asset with no risk. It is the minimum rate of return an investor expects to earn to compensate for the time value of money and the opportunity cost of not investing in a risk-free asset. Therefore, the correct answer is B, the risk-free interest rate.

The Vertical Intercept of the Security Market Line (SML) Shows