Carl Vandenberg has been asked to explain the security market line (SML), including its slope. Which of the following is equal to the slope of the SML?
Click on the arrows to vote for the correct answer
A. B. C.C
The slope of the Security Market Line (SML) represents the relationship between the expected return and the systematic risk of an investment. It is commonly used in finance to assess whether an investment offers a sufficient return given its level of risk.
Among the given options, the slope of the SML is equal to the answer A: Beta.
Beta is a measure of systematic risk, specifically the sensitivity of an investment's returns to fluctuations in the overall market. It compares the volatility of the investment's returns to the volatility of the market as a whole. The beta coefficient quantifies the extent to which an investment moves in relation to the market.
The slope of the SML represents the market's risk premium per unit of systematic risk, and it is measured by beta. The market risk premium is the excess return that investors expect to earn by investing in a risky asset compared to a risk-free asset. In other words, it represents the additional compensation that investors require for taking on systematic risk.
The SML equation is as follows: Expected Return = Risk-Free Rate + (Beta × Market Risk Premium)
The slope of the SML is equal to the coefficient of beta in the equation. It indicates the additional return expected for each unit increase in beta. If an investment has a higher beta, it is considered to have higher systematic risk and should offer a higher expected return to compensate investors for the increased risk. Conversely, an investment with a lower beta would have a lower expected return.
To summarize, the slope of the SML is equal to beta, which measures the systematic risk of an investment and represents the additional expected return per unit of systematic risk.