Asked by Christopher Adams on Jul 23, 2024
Verified
The steeper the slope of the security market line, the:
A) Higher the risk-free rate of return.
B) Lower the risk-free rate of return.
C) Higher the market beta.
D) Higher the risk premium.
E) Lower the risk premium.
Security Market Line
A representation in the capital asset pricing model (CAPM) showing the relationship between expected return and systematic risk.
Risk Premium
The extra return expected by an investor for holding a risky asset instead of a risk-free asset.
- Realize the implications of the slope of the security market line on market perceptions of risk and return.
Verified Answer
R&
Russell & Amanda MishlerJul 24, 2024
Final Answer :
D
Explanation :
The steeper the slope of the security market line (SML), the higher the risk premium. The slope of the SML represents the market risk premium, which is the additional return over the risk-free rate that investors demand for taking on higher risk. A steeper slope indicates a higher risk premium.
Learning Objectives
- Realize the implications of the slope of the security market line on market perceptions of risk and return.