A line from the risk free rate through the return associated with a beta of 1.0 is the
A) capital market line.
B) line of dominance.
C) security market line.
D) stochastic dominance line.

Question

Quizplus · Accepted Answer

The security market line (SML) represents the expected return of a security or portfolio in relation to its beta with the market. The SML is a graphical representation of the Capital Asset Pricing Model (CAPM), which shows the relationship between the risk of an asset as measured by its beta and the expected return. The line starts from the risk-free rate (where beta is 0) and goes through the market portfolio (where beta is 1), illustrating how expected return increases with beta.

A Line from the Risk Free Rate Through the Return