Question

The security market line depicts:

a. A security’s expected return as a function of its systematic risk.

b. The market portfolio as the optimal portfolio of risky securities.

c. The relationship between a security’s return and the return on an index.

d. The complete portfolio as a combination of the market portfolio and the risk-free asset.

Short answer

The Correct answer is ‘a,’

Step-by-step solution

Definition

Security Market Line (SML) represents the Capital Asset Pricing Model on a graph. It is used to display the expected return of a security as a function of various risks.

Solution

Since the SML depicts the expected return by a security for the systematic risk taken by it, the correct answer from the above options is ‘a’.

Since it is used by investors to decide whether to use this security in their portfolio or not, the options ‘b’ and ‘d’ cannot be correct.

Also the SML is used to depict the relationship between expected relationship and beta, the statement given in option ‘c’ can not be correct.