In the presence of transactions costs, the SML will be
A) a single straight line.
B) a kinked line.
C) a set of lines rather than a single straight line.
D) a curve rather than a single straight line.
E) impossible to determine.

Question

Quizplus · Accepted Answer

In the presence of transaction costs, the Security Market Line (SML) becomes a set of lines rather than a single straight line. This is because transaction costs can vary for different securities and investors, leading to different expected returns for the same level of risk, thus deviating from the idealized single straight line of the SML without transaction costs.

In the Presence of Transactions Costs, the SML Will Be