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Basic Question 6 of 11
Which of the following statements about the security market line (SML) is (are) true?
II. The SML leads all investors to invest in the same portfolio of risky assets.
III. The SML is a graphic representation of the relationship between expected return and beta.
IV. Properly valued assets plot exactly on the SML.
I. The SML provides a benchmark for evaluating expected investment performance.
II. The SML leads all investors to invest in the same portfolio of risky assets.
III. The SML is a graphic representation of the relationship between expected return and beta.
IV. Properly valued assets plot exactly on the SML.
User Contributed Comments 7
| User | Comment |
|---|---|
| mtcfa | Can anyone explain II? Does that mean all investors will choose the portfolio where the beta = 1? |
| crash | Yes, but the portion (percentage) of his total investment is different, depending on the investor's degrees of risk averse. |
| Swetha | Crash, but isn't that true with CML and not SML ? |
| simonjdp | Is true for CML but also for SML. Can use SML for a portfolio since a portfolio can also be viewed as an asset |
| thekapila | ii is true since SML is valid for both efficient portfolio and individual assets as well. |
| bmeisner | I don't agree with 2. I don't think the SML has anything to say about which portfolio an investor chooses. 4 demonstrates my view of the SML, any asset that is properly priced will fall on the SML and in my mind 4 implies 2 is false because CAPM assumes all assets are properly priced because all investors have the same expectations and thus any asset will have an excess return corresponding to its beta so therefore choice of portfolio or asset is irrelevant. |
| DariSH | I guess, since any investor's systematic risk should be close to market's, the individual portfolio's beta should be about 1. therefore, on SML this would be just one rate of return corresponding to it. So II is correct. The only thing investor can influence, is weights of its assets in portfolio. |
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Learning Outcome Statements
explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML)
calculate and interpret the expected return of an asset using the CAPM
CFA® 2024 Level I Curriculum, Volume 2, Module 2.