The security market line displays the relationship between expected return and beta.

Question

Quizplus · Accepted Answer

The security market line (SML) represents the relationship between expected return and beta, where beta is a measure of a stock's systematic risk. The slope of the SML is the market risk premium, which is the additional return that investors expect to receive for taking on the systematic risk of the market. Securities that lie on the SML are considered fairly priced, while securities above or below the SML are overvalued or undervalued, respectively.

The Security Market Line Displays the Relationship Between Expected Return