Which of the following statements is correct?
A)The slope of the security market line is equal to the market risk premium.
B)Lower beta stocks have higher required returns.
C)A stock's beta indicates its company-specific risk.
D)Two securities with the same stand-alone risk will have the same betas.

Question

Quizplus · Accepted Answer

The slope of the security market line (SML) represents the market risk premium, which is the additional return investors require for investing in a risky asset compared to a risk-free asset. Therefore, statement A is correct.

B is incorrect as lower beta stocks have lower required returns.

C is incorrect as a stock's beta measures its systematic risk, or the risk that cannot be diversified away by holding a portfolio of assets. Beta does not capture company-specific risk, which is idiosyncratic and can be diversified away in a portfolio of assets.

D is incorrect as two securities with the same stand-alone risk can have different betas if they have different systematic risk. Beta measures systematic risk, which is not solely determined by stand-alone risk.

Which of the Following Statements Is Correct