Asked by Shiva Ghahramani on May 13, 2024
Verified
Which of the following is correct regarding the SML?
A) The X-axis intercept of the SML represents the required return of a portfolio with a beta of 0, or the risk-free rate.
B) The Y-axis intercept of the SML represents the required return of a portfolio with a beta of 0, or the risk-free rate.
C) The X-axis intercept of the SML represents the required return of a portfolio with a beta of greater than 0, or the risk-free rate.
D) The X-axis intercept of the SML represents the required return of a portfolio with a beta of less than 0, or the 10-year Government of Canada bond yield.
SML
Stands for the Security Market Line, which represents the expected return of a market portfolio as a function of systematic, or market, risk.
Risk-Free Rate
The theoretical rate of return of an investment with no risk of financial loss.
- Synthesize the principles of beta, the correlation between risk and return, and the Security Market Line (SML) to inform investment choices.
Verified Answer
MS
Marisa SerohijosMay 18, 2024
Final Answer :
B
Explanation :
The Y-axis intercept of the SML represents the required return of a portfolio with a beta of 0, or the risk-free rate. The X-axis intercept of the SML represents the required return of the market portfolio, not a portfolio with a specific beta. Therefore, choices A, C, and D are incorrect.
Learning Objectives
- Synthesize the principles of beta, the correlation between risk and return, and the Security Market Line (SML) to inform investment choices.