According to the CAPM, ______ securities must lie _________.
A) all, on the capital market line
B) underpriced, below the security market line
C) all, on the security market line
D) overpriced, above the security market line

Question

Quizplus · Accepted Answer

According to the CAPM, all securities must lie on the security market line (SML). The SML is a sloping straight line that shows the expected return-beta relationship of the market portfolio. The beta is a measure of a security's systematic risk and represents the extent to which the security's return moves with the market. The SML shows that the expected return of a security is equal to the risk-free rate plus the market risk premium, multiplied by the security's beta. Therefore, all securities must plot on the SML to reflect their expected returns based on their level of risk (beta).

According to the CAPM, ______ Securities Must Lie _________

According to the CAPM, Securities Must Lie ___