According to the capital asset pricing model,_________.
A) all securities' returns must lie on the capital market line
B) all securities' returns must lie on the security market line
C) the slope of the security market line must be less than the market risk premium
D) any security with a beta of 1 must have an excess return of zero

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) suggests that all securities' returns must lie on the security market line (SML), which is the graphical representation of the CAPM. The SML is a linear function that relates the required rate of return of a security to its systematic risk measured by beta. Therefore, option B is the correct answer. Option A is incorrect because the capital market line (CML) is the graphical representation that shows the expected return for a given level of risk for the entire market portfolio of risky assets, including both the market index and the risk-free asset. Option C is incorrect because the slope of the SML must be equal to the market risk premium, not less than it. Option D is incorrect because any security with a beta of 1 will have an expected return equal to the risk-free rate plus the market risk premium, not necessarily an excess return of zero.

According to the Capital Asset Pricing Model,_________