Question

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.

Short answer

Statements a, c, and d are true.

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.