Analysis of returns using the SML would indicate that

Question

Quizplus · Accepted Answer

A) The SML (Security Market Line) shows the relationship between risk (beta) and return. As Betas increase, the expected return should also increase according to the SML.

B) According to the SML, the required return for all securities can be expressed as the risk free rate plus a premium for risk, since the risk premium is determined by the market as a whole and is added to the risk-free rate.

C) If the Beta is 2.0, the expected return must be higher than if it were 1.0, in order to compensate for the higher risk. However, it is not necessarily twice the market risk premium.

Therefore, all of the answer choices are correct.

Analysis of Returns Using the SML Would Indicate That