Author Question: What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0, ... (Read 382 times)

09madisonrousseau09

  • Hero Member
  • *****
  • Posts: 559
What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0, what type of return should it realize compared to the market portfolio?
 
  What will be an ideal response?

Question 2

According to the security market line, there is no reward for waiting. In other words, in order to have any expected return at all, an investor must invest in risky assets.
 
  Indicate whether the statement is true or false.



Li Jun

  • Sr. Member
  • ****
  • Posts: 335
Answer to Question 1

Answer: The equation for the SML is E(ri) = rf + E(rm) - rf  i, where: E(ri) is the expected return on an asset, rf is the risk-free rate, i is beta the measure of nondiversifiable risk for asset i, E(rm) is the expected return for holding the market portfolio of risky assets, and E(rm) - rf is the market risk premium that an investor can expect to earn for holding the market portfolio. If an asset has a beta of 2.0, an investor can expect to receive twice the market risk premium in addition to the risk-free rate of return. A common misconception is that the investor can expect to receive twice the rate of return as the market portfolio, but only the risk premium is impacted by the level of risk.

Answer to Question 2

Answer: FALSE
Explanation: According to the security market line, there is a reward for waiting. The risk-free asset can provide you with a positive return without uncertainty of return.



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Never take aspirin without food because it is likely to irritate your stomach. Never give aspirin to children under age 12. Overdoses of aspirin have the potential to cause deafness.

Did you know?

Symptoms of kidney problems include a loss of appetite, back pain (which may be sudden and intense), chills, abdominal pain, fluid retention, nausea, the urge to urinate, vomiting, and fever.

Did you know?

Illicit drug use costs the United States approximately $181 billion every year.

Did you know?

Vaccines cause herd immunity. If the majority of people in a community have been vaccinated against a disease, an unvaccinated person is less likely to get the disease since others are less likely to become sick from it and spread the disease.

Did you know?

A strange skin disease referred to as Morgellons has occurred in the southern United States and in California. Symptoms include slowly healing sores, joint pain, persistent fatigue, and a sensation of things crawling through the skin. Another symptom is strange-looking, threadlike extrusions coming out of the skin.

For a complete list of videos, visit our video library