If the assumption that there are no transaction costs is relaxed, the SML will be a
A) straight line.
B) band of securities.
C) convex curve.
D) concave curve.
E) parabolic curve.

Question

Quizplus · Accepted Answer

When the assumption of no transaction costs is relaxed, the Security Market Line (SML) becomes a band of securities rather than a straight line. This is because transaction costs introduce a range within which the cost of buying or selling securities can vary, leading to a spread or band around the theoretical SML where securities can be plotted.

If the Assumption That There Are No Transaction Costs Is