Asked by Jessie Ernst on Jul 07, 2024
Verified
Which of the following is the best definition of security market line (SML) ?
A) A theory showing that the expected return on any risky asset is a linear combination of various factors.
B) A risk that affects at most a small number of assets. Also called unique or asset-specific risks.
C) A risk that influences a large number of assets. Also called market risk.
D) Positively sloped straight line displaying the relationship between expected return and beta.
E) Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.
Security Market Line
A graphical representation of the expected return of investments as a function of their risk, specifically their beta.
Expected Return
The average of all the possible returns for an investment, weighted by their respective probabilities.
Beta
A measure of a stock's volatility in relation to the overall market, used to gauge a stock's risk level relative to the market average.
- Familiarize yourself with the concepts of the security market line (SML) and beta, understanding their relevance in portfolio management.
Verified Answer
GN
Geraldine NkwainJul 09, 2024
Final Answer :
D
Explanation :
The security market line (SML) is best defined as a positively sloped straight line displaying the relationship between expected return and beta, which represents the risk-return trade-off at any given time for all risky assets.
Learning Objectives
- Familiarize yourself with the concepts of the security market line (SML) and beta, understanding their relevance in portfolio management.