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Essentials Of Investments
Found in: Page 229
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Which of the following statements about the security market line (SML) are true?

a. The SML provides a benchmark for evaluating expected investment performance.

b. The SML leads all investors to invest in the same portfolio of risky assets.

c. The SML is a graphic representation of the relationship between expected return and beta.

d. Properly valued assets plot exactly on the SML.

Statements a, c, and d are true.

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Step by Step Solution

Definition

The representation of Capital Asset Pricing Model on graph is known as Security Market Line (SML). It displays the expected return of a security as a function of various risks.

Solution

From the above definition, since the SML gives a benchmark for evaluating expected returns of an investment and graphically displays the relationship between expected returns and β where the X axis is the systematic risks (measured in β) and Y axis is the expected returns, the correct statements from the options above would be a, c and d.

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