Asked by Ashly De Jesus on Jun 09, 2024
Verified
Which of the following is correct regarding the SML?
A) The greater the marginal investor's risk aversion, the steeper the SML.
B) The greater the marginal investor's risk aversion, the flatter the SML.
C) The greater the marginal investor's risk aversion, the more negative the SML slope.
D) The lower the marginal investor's risk aversion, the steeper the SML.
Marginal Investor's Risk Aversion
A concept that describes the level of additional risk an investor is willing to take for a marginal increase in potential return.
SML
Stands for the Security Market Line, representing the expected return of investments as a function of their non-diversifiable risk.
- Combine understanding of beta, the risk-return relationship, and the Security Market Line (SML) to guide investment strategies.
Verified Answer
NS
Nicholas SattaurJun 09, 2024
Final Answer :
A
Explanation :
The Security Market Line (SML) represents the expected return of a security or portfolio in relation to its beta with the market. The slope of the SML is determined by the market price of risk, which increases with the marginal investor's risk aversion. Therefore, a greater risk aversion leads to a steeper SML, as investors require higher returns for taking on additional risk.
Learning Objectives
- Combine understanding of beta, the risk-return relationship, and the Security Market Line (SML) to guide investment strategies.