The security market line relates the return on a stock to interest rates and the market risk associated with the stock.

Question

Quizplus · Accepted Answer

The security market line (SML) is a graphical representation of the expected return of a security as a function of its systematic risk (beta) and the expected market return. It is used to determine whether a particular security is undervalued or overvalued based on the risk and return relationship. The SML is used in the capital asset pricing model (CAPM) to calculate the expected return on an investment. Therefore, the statement is true.

The Security Market Line Relates the Return on a Stock