The slope of the security market line is:

Question

Quizplus · Accepted Answer

The slope of the security market line represents the excess return (i.e. expected return less risk-free rate) investors demand for each unit of market risk (i.e. market return less risk-free rate). Therefore, the formula for the slope of the security market line is the excess return of the market (E(Rm) - Rf) divided by the market risk premium (beta * [E(Rm) - Rf]), which can be rearranged to (E(Rm) - Rf) / [beta * (E(Rm) - Rf)]. Simplifying the expression yields (E(Rm) - Rf) * beta, which is equivalent to A.

The Slope of the Security Market Line Is