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Explain why in a highly competitive market all stocks should plot on the same security market line.
On May 14, 2024
The security market line for all stocks will have the same intercept point, which is the risk-free rate of return as represented by the Treasury bill rate. In a highly competitive market, all stocks should be priced correctly so that the risk-reward ratio is constant. A constant risk-reward ratio would cause all stocks to plot on the same security market line due to the fact that the risk-reward ratio is the slope of that line.