Other things held constant, if the expected inflation rate DECREASES, and investors also become MORE risk averse, the Security Market Line would shift in have a steeper slope manner.

<h3>What is the Security Market Line (SML)?</h3>

The security market line (SML) is the Capital Asset Pricing Model (CAPM). It gives the market’s expected return at different levels of systematic or market risk. It is also called the ‘characteristic line’ where the x-axis represents the asset’s beta or risk, and the y-axis represents the expected return.

Security Market Line Equation

The Equation is as follows:

SML: E(Ri) = Rf + βi [E(RM) – Rf]

In the above security market line formula:

E(Ri) is the expected return on the security.
Rf is the risk-free rate and represents the y-intercept of the SML.
βi is a non-diversifiable or systematic risk. It is the most crucial factor in SML. We will discuss this in detail in this article.
E(RM) is expected to return on market portfolio M.
E(RM) – Rf is known as Market Risk Premium.

Characteristics of the Security Market Line (SML) are as below:

SML is a good representation of investment opportunity cost, which combines the risk-free asset and the market portfolio.
Zero-beta security or zero-beta portfolio has an expected return on the portfolio, which is equal to the risk-free rate.
The slope of the Security Market Line is determined by the market risk premium, which is: (E(RM) – Rf). Higher the market risk premium steeper the slope and vice-versa
All the assets which are correctly priced are represented on SML.
The assets above the SML are undervalued as they give a higher expected return for a given amount of risk.
The assets below the SML are overvalued as they have lower expected returns for the same amount of risk.

Therefore, we can conclude that the correct option is A.

Learn more about Security Market Line (SML) on:

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6 0

1 year ago

Now it’s time to write about what you believe about the First Amendment. Here is your topic: Should students be able to criticiz

kogti [31]

Answer:

Yes, the students should be able to criticize their school in the school newspaper to an agreeable extent.

Explanation:

To allow the students to bring into practice the education that they are given about the Constitution and the rights granted by the Constitution, they should be given the opportunity to exercise their rights at the school level itself.
These rights should also include the right to free speech. The students should be allowed to freely put up their thoughts about the school's functioning and its management.
At the same time, students should not be allowed to speak about the mandatory things done by the management for the good of the students.

6 0

3 years ago