The Security Market Line

question 167

Multiple Choice

The security market line:

• A) Is a quadratic function depicting the relationship between risk and return.
• B) Has a slope which is equal to the market risk premium.
• C) Has an intercept point which is equal to the market rate of return.
• D) Has a slope which is equal to the risk-free rate of return.
• E) Is a linear function of the relationship between total risk and the market rate of return.

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Definitions:

Expected Return-Beta Relationship

A concept in finance that describes the relationship between the risk of an investment and its expected return, based on the beta coefficient.

APT

The Arbitrage Pricing Theory, a model that determines the required return on an asset by considering various macroeconomic factors.

CAPM

The Capital Asset Pricing Model, a financial theory that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Firm-Specific Factors

Unique characteristics or circumstances affecting a company that can influence its stock's performance, unrelated to the overall market movements.