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Security Market Line (SML)

51. Pick the statement that is most correct.

1. The SML relates required returns to firm's systematic or market risk. The slope and intercept of this line cannot be controlled by the financial manager.

2. The slope of the SML is determined by the value of the beta.

3. If you plotted the returns of a given stock against those of the market and you found that the slope of the regression line was negative, the CAPM would indicate that the requied rate of return on the stock shold be less than the risk free rate for a well idversified investor assuming that the observed relationship is expected to continue on into the future.

4. If investors become less risk averse, the slope of the Security Market Line will increase.

5. Statements 1 and 3 are both true

Solution Preview

Pick the statement that is most correct.

1. The SML relates required returns to firm's systematic or market risk. The slope and intercept of this line cannot be controlled by the financial manager.

2. The slope of the SML is determined by the value of the beta.

3. If you plotted the returns of a given stock against those of the market and you found that the ...

Solution Summary

Answer to a multiple choice question on Security Market Line (SML).

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