Answer: C. The risk-free rate
Explanation: According to the Capital Asset Pricing Model, the security market line is a straight line. The intercept of this line should be equal to:
A. Zero
B. The expected risk premium on the market portfolio
C. The risk-free rate
D. The expected return on the market portfolio
The intercept of the security market line (This line shows the expected rate of return of a security as a function of systematic, non-diversifiable risk (beta), in other words, it is simply the line on which all capital investments lie) is equal to the risk-free interest rate (the theoretical rate of return of an investment with no risk of financial loss) according to the Capital Asset Pricing Model (CAPM).
The line is represented graphically as a straight line with risk on its horizontal axis, which is the independent variable, and expected return on the vertical axis, which is the dependent variable. The security market line also shows that investors would want higher rates of return with increasing levels of risk taken.
