The securities market line (SML) based upon the CAPM expresses the relationship between

The securities market line (SML) based upon the CAPM expresses the relationship between
A . asset beta and expected returns
B . asset standard deviation and expected returns
C . excess returns from the asset and its standard deviation
D . market returns and asset returns

View Answer

Answer: A

Explanation:

The security market line is generally shown graphically with returns on the y-axis and the asset’s beta on the x-axis. The correct answer is Choice ‘a’.

Note the difference between the SML and the CML (the capital markets line). The CML is the transformation line joining the risk free rate on the y-axis and the portfolio with the maximum Sharpe ratio on the efficient frontier, and expresses the relationship between risk and return.