QuestionDecember 14, 2025

7. The Security Market Line represents the relationship between: A) Expected return and total risk B) Expected return and beta C) Market return and inflation D) Risk-free rate and dividends

7. The Security Market Line represents the relationship between: A) Expected return and total risk B) Expected return and beta C) Market return and inflation D) Risk-free rate and dividends
7. The Security Market Line represents the relationship between:
A) Expected return and total risk
B) Expected return and beta
C) Market return and inflation
D) Risk-free rate and dividends

Solution
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Answer

B) Expected return and beta Explanation 1. Identify the Security Market Line (SML) SML is a graphical representation of the Capital Asset Pricing Model (CAPM). 2. Recall CAPM formula The key formula is E(R_i) = R_f + \beta_i(E(R_m) - R_f), showing expected return as a function of beta. 3. Match with options Only option B describes the relationship between expected return and beta.

Explanation

1. Identify the Security Market Line (SML)<br /> SML is a graphical representation of the Capital Asset Pricing Model (CAPM).<br />2. Recall CAPM formula<br /> The key formula is $E(R_i) = R_f + \beta_i(E(R_m) - R_f)$, showing expected return as a function of beta.<br />3. Match with options<br /> Only option B describes the relationship between expected return and beta.
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