Which of the following statements are true? Why? •The Security Market Line (SML)

Question

Which of the following statements are true? Why?

•The Security Market Line (SML) relates required returns to firms’ market risk. The slope and intercept of this line are controlled by the financial manager.

•The slope of the SML is determined by the value of beta.

•If you plotted the returns of a given stock against those of the market, and if you found that the slope of the regression line was negative, then the CAPM model would indicate that the required return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue on into the future.

•If investors become less risk averse, the slope of the SML will increase.

Explanation / Answer

•If you plotted the returns of a given stock against those of the market, and if you found that the slope of the regression line was negative, then the CAPM model would indicate that the required return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue on into the future.
The above option is correct which is the third option from top because CAPM model will deduct a risk premium from risk free rate giving a return less than risk free rate

First is not true because The slope (r(m) - r(rf)) and intercept (r(rf)) of the SML cannot be controlled by the financial manager.

2nd option is not true because The slope of the SML is r(m) - r(rf), not beta.
4th option is not true because if investors become less risk averse, the slope of the SML will decline, not increase.

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